Investors Should Approach Exchange Traded Funds (ETFs) with Extreme Caution

Representing Investors Nationwide

 

Exchange Traded Funds (or ETFs) can be extremely misleading investments. To say they are complex would be an understatement. To say they are suitable for the average investor would be dangerous.

Countless American consumers have fallen prey to the deceptive sales literature and advertising relating to these investments. To make matters worse, stockbrokers have been aggressively and unsuitably marketing ETFs to seniors and conservative investors for years, and many consumers have lost a large percentage of their life savings as a result.

If you suffered financial damages after buying an ETF recommended by your stockbroker, you may be eligible to receive full or partial compensation for your loss.
How ETFs Work

Like the name suggests, Exchange Traded Funds are investment products that are traded on the major stock exchanges. They can be bought and sold as easily and cheaply as stock. Most ETFs are associated with a major stock index. In other words, an ETF will try to rise and fall in value in the same way as a particular stock index. For example, if the Dow Jones index goes up 1%, then an ETF that tracks it will also try to go up 1%. Similarly, if the Dow goes down 2% then the ETF will try to go down 2%.  In this way, a basic ETF acts like an index mutual fund, but this is where the similarities end.

Why Are ETFs Risky?

Unlike mutual funds, ETFs are often secured by a large bank or financial institution. In other words, if the bank goes under, then your ETF investment could potentially become worthless.

One of the biggest advantages of mutual funds is diversification, i.e., a mutual fund will invest your money into a spread of different investments and not just one or two. However, the fact that your ETF depends on the viability of one single financial institution creates an element of risk that most investors are never told about when they buy an ETF.

ETF fraud usually involves the following extremely speculative types of exchange traded funds:

·         Leveraged ETFs: Leveraged ETFs try to multiply the ups and downs of major indices. In other words, when the Dow index goes up 3%, a Leveraged ETF might try to double that result by going up 6%. Conversely, if the index goes down by 3%, the same double-leveraged ETF will try to go down by 6%. Some Leveraged ETFs might double or triple the performance of an index, or even more. 

 

·         Inverse ETFs: Inverse ETFs go backwards, against the movements of an index. In other words, if the index goes up by a certain amount, then the ETF will try to godown by the same amount.

 

·         Leveraged Inverse ETFs: Inverse Leveraged ETFs do exactly as the name implies. They move backward, against the movements of an index, but they do so in multiples. 

Why Are ETFs Unsuitable?

As you can see, leveraged ETFs, inverse ETFs and leveraged inverse ETFs take the normal performance of an index and make it much more volatile. It would be impossible to classify these kinds of ETFs as conservative. They are therefore highly unsuitable for conservative and risk-averse investors, like retirees.

More poignantly, leveraged, inverse and leveraged inverse ETF managers utilize extremely complicated and sophisticated investment strategies in order to achieve their results. Such strategies include option trading, derivative swaps and other difficult to understand investment techniques. All these complex transactions are taking place inside an ETF every day but most investors have no idea. The average investor simply does not have the training or experience to understand the risks involved in such strategies.

There’s another problem with leveraged ETFs in particular, which was illustrated in a warning issued by the Financial Industry Regulatory Authority (FINRA). It involves the real dangers to long-term investors posed by leveraged ETFs. Basically, the problem is that Leveraged ETFs are only meant to accurately track the performance of an index within the span of a single day. As the days turn into weeks, months, or years, ETFs tend to get completely out of sync over the long term. They could gain considerable value in relation to the index or they could decline by a devastating amount, causing massive and unexpected losses for the investors who bought them.

Do You Suspect That You Were The Victim Of ETF Fraud?

ETF fraud victims are often sold a bill of goods, which they do not fully understand. Investment advisors sell ETFs as mutual fund alternatives, but they do not explain the numerous and complicated risks that fester beneath the surface. Indeed, even if a stockbroker tried to explain the risks he would have a very hard time doing so. The fact is, most investors (and many stockbrokers) simply cannot understand the hidden risks involved with ETFs.

It’s because of these risks and complexities that ETFs are extremely unsuitable for the average investor. And this is why, if you lost money in ETFs, you may have a claim to get your money back. If your stockbroker told you to buy these highly unsuitable investments and you have suffered financially because of that recommendation, contact us now for a free consultation and a legal review of your case.