Are Exchange Traded Funds Risky for the American Consumer?
In recent years, ETFs (Exchange Traded Funds) have become startlingly popular. This is surprising because they can be extremely unsuitable for the average consumer, especially senior citizens, retirees and conservative-minded investors.
ETF fraud has caused US consumers to lose massive amounts of money, all of which could have been avoided. The problem with ETFs lies in how they appear on the surface. In most cases, even stockbrokers and investment advisors don’t understand the true risks associated with ETFs.
Wall Street brokerage firms and stockbrokers have a legal duty to ‘know their customers’ and to know that the investments they recommend are suitable for their customers’ needs. If you suffered financial damages because your stockbroker recommended you buy an ETFs, you may be able to file a claim to get your money back.
Exchange Traded Funds Are Not What They Appear
The average investor would never buy a ‘designer’ or ‘cocktail’ investment like an ETF without having someone he or she trusted recommend it (or without having a very solid idea of what it was and what it would do for him). Indeed, this is why we hire investment advisors, because they’re supposed to know what they’re talking about, give us advice in our best interests, and steer us on the most prudent course for our retirement.
Unfortunately, stockbrokers often misrepresent ETFs as a cheaper and more convenient alternative to index mutual funds. However, ETFs have a lot more going on under the surface than a mutual fund does. For example, ETFs often employ hidden, complicated and risky strategies to achieve their goals. There are also many types and varieties of ETFs that are a lot more hazardous than others.
Why Do People Buy ETFs?
Let’s take a look at the surface-level benefit of buying into an ETF so we can understand why they’ve become so dangerously popular:
- ETFs are bought and sold daily on the major stock exchanges, hence their name ‘Exchange Traded Funds.’ This makes them exceedingly cheap and easy to buy and sell.
- ETFs are supposed to ‘track’ or ‘mirror’ the performance of different stock market indices. For example, an ETF might track the ‘S&P 500 Index.’ If the S&P goes up 1%, an ETF that tracks the S&P will also try to go up 1%. This makes them appear like a suitable alternative to index mutual fund when in fact they are not.
ETFs appear to come with two big benefits: (1) the convenience and affordability of buying a stock and (2) the balance and diversity of a mutual fund. Unfortunately, this just isn’t always true.
ETFs Risks
There are a lot of different kinds of ETFs. Some basic ETFs might be suitable for an average investor if he or she is well aware of the risks involved. Other ETFs, though, is only suitable for highly sophisticated traders, due to the risks and complexities involved.
The most dangerous types of ETFs are Leveraged ETFs, Inverse ETFs, and Leveraged Inverse ETFs. Most ETF fraud happens with these high-risk ETF varieties. Though, ETF fraud can happen with basic ETFs too.
If you suffered investment damages after buying an ETF, here are some problems that might be associated with your investment:
- High Volatility: Some Exchange Traded Funds use extremely risky and sophisticated investment strategies to ‘leverage’ the performance of the index they track. Leveraged ETFs will go up and down with the index, but they might multiply the performance by two, three or more. For example, if the index goes up 2 points, the leveraged ETF might go up 4 points or if it goes down by 10 points the ETF will try to go down by 10 points. This multiplication of the volatility in an index is unsuitable for most investors.
- Unsuitable For The Long Term: Some ETFs are very unsuitable as long-term investments. Leveraged ETFs, for example, might track an index successfully one day at a time, but weekly, monthly and yearly, there is a high likelihood it will get completely off-track, causing big losses to long-term investors.
- Difficult To Evaluate Risk (Even For The Experts): Leveraged ETFs multiply the ups and downs of the indexes they track. Inverse ETFs, on the other hand, go up when the index goes down, acting in the opposite direction as the index. Then we have Leveraged Inverse ETFs, which do the opposite of what the index does in multiples. Confused yet? This activity, and the sophisticated trading strategies used to achieve, it makes these ETFs extremely risky investments that simply aren’t suitable for the average consumer.
- Highly Sophisticated Trading Strategies: Some Exchange Traded Funds employ the use of derivative swaps, options trading and other highly complex and speculative strategies to achieve their investment goals.
- Unsecured Promises From Banks: Some Exchange Traded funds are backed by financial institutions and if those institutions go bankrupt, the ETF investor may unexpectedly lose all or some of his investment in the ETF, regardless of how well the actual ETF was performing.
- Lack Of Transparency: The investments held inside the ETF are sometimes kept secret. Investors may have no idea what the ETF holds inside it. In fact, some ETFs may not even be invested in the index they track at all. These kinds of ETFs achieve their objectives through derivative swaps and other sophisticated trading techniques.
These are just some of the more serious problems with ETFs. However, these risky varieties of ETFs are often misrepresented to consumers as “mutual fund alternatives.” Plus, Wall Street banks and brokerage firms spend millions of dollars creating marketing literature that makes these unsuitable investments look safe and appropriate for the average consumer, just to convince you to buy them.
Contact Us
White collar crime can be horrendous for its victims. Financial damages are not just about the money either. The loss of wealth and resources can destroy health, marriages, relationships, independence, quality of life and your ability to take care of yourself. Even if you don’t think you lost much, you can bet that someone else has lost millions of dollars and had their lives completely ruined from the exact same kind of fraud.
If you suffered financial losses due to ETF fraud, you can file a claim to try and get your money back. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have, and discuss your legal rights and options.