Exchange traded funds (ETFs) seem simple at first glance, but if you take a moment to dig beneath the surface, you’ll discover that certain varieties of ETFs are riskier and more complicated than they appear.
The biggest brokerage firms on Wall Street often try to bait consumers with ‘designer’ investment products like exchange traded funds. These investments usually come with enticing incentives. However, in the case of ETFs, they can be so complex that even the stockbrokers who sell them don’t always understand the risks involved.
If you requested safe and conservative investments, but your stockbroker recommended leveraged ETFs, inverse ETFs or leveraged-inverse ETFs, you may be the victim of ETF fraud. Victims of ETF fraud who lost money after investing in these risky securities may be able to receive full or partial reimbursement for their losses.
How Exchange Traded Funds Happens
Stockbrokers usually advertise ETFs as a cheap alternative to index mutual funds. For some investors, a basic ETF might be appropriate. However, different and riskier kinds of ETFs exist.
The riskiest ETFs include:
- Leveraged ETFs
- Inverse ETFs
- Leveraged-Inverse ETFs
ETF fraud usually happens when investment advisors recommend leveraged, inverse or leveraged inverse ETFs to conservative investors and/or investors who don’t understand the risks involved. ETF fraud can happen with basic ETFs as well.
Exchange Traded Funds Risks
A basic ETF is typically invested in a major stock index, like the S&P 500. They are supposed to rise and fall in value along with the index, similar to the way an index mutual fund does. The difference is that ETFs are bought and sold on the stock market, making them cheaper and easier to buy than index mutual funds.
It sounds like they’re the best of both worlds – the growth and diversity of an index fund with the ease and affordability of a stock. But this is not necessarily the case. To say that Exchange Traded Funds are an equal alternative to index mutual funds is exceedingly misleading.
The worst ETF fraud happens when investors are recommended Leveraged ETFs, Inverse ETFs, and Leveraged Inverse ETFs. Here’s why these investments are highly unsuitable for the typical investor:
- Leveraged ETFs: Like basic ETFs, leveraged ETFs rise and fall in value along with the index they track. However, Leveraged ETFs try to multiply the performance of the index. If the index goes down by 2 points, a leveraged ETF might go down by 4. Some will try to triple the performance or more. This multiplying factor makes leveraged ETFs too volatile and risky for the average investor.r:
- Inverse ETFs: Inverse ETFs try to do the opposite of the index they track. If the index drops by 2, the Inverse ETF will rise by 2. This is a very sophisticated investment strategy like short selling. It’s unsuitable for the average investor because it takes investment training and experience to appreciate the dangers involved.
- Leveraged-Inverse ETFs: Leveraged inverse ETFs do the opposite of the index they track but in multiples. This kind of ETF is extremely difficult to predict from a risk perspective. It’s not suitable for the average investor.
- Some are bad for the long term: Leveraged ETFs are unsuitable as long-term investments. They may achieve their goals of multiplying the performance of an index on a daily basis, but on a yearly, monthly or even weekly basis, there is a high likelihood of getting off track, resulting in serious financial losses.
- Complex strategies: ETF managers often employ complex derivative swaps, options trading and other complicated strategies that are unsuitable for most investors.
- The backing financial institution could fail: ETFs may be secured or backed by financial institutions. If the institution goes bankrupt, ETF shareholders risk losing all or a large portion of their investment.
- Hidden surprises: No two ETFs are exactly alike. They can have hidden surprises in their prospectuses. Investors rarely know what they’re actually getting into and this can result in misconceptions about the dangers involved.
Know Your Rights
The Financial Industry Regulatory Authority (FINRA), which holds stockbrokers and brokerage firms accountable for unsuitable investment advice and fraud, issued a report in 2009 warning investors and stockbrokers about the dangers of leveraged, inverse and leveraged inverse ETFs. FINRA’s warning clearly states that these investments contain hidden risks making them inappropriate for unsophisticated, conservative and/or long-term investors.
When an investor files a claim for ETF fraud, the unsuitability of the investment advice is a major issue, therefore FINRA Rule 2111 and FINRA Rule 2090 will apply to most ETF fraud claims. Click here to learn more about the doctrine of suitability, and unsuitability claims in general.
Do you suspect that your investment losses were the result of ETF fraud?
Try and Get Your Money Back
If you lost money because your stockbroker inappropriately recommended ETFs for your accounts or because he failed to disclose the true risks involved with ETFs, you can make a claim for damages and try to get your money back.
The financial damages resulting from ETF fraud can be crippling, but the realization that your stockbroker neglected your account or purposefully misled you can be emotionally disturbing. If you have fallen victim to this kind of fraud, it’s important to remember this is not your fault!
Pursuing a stock fraud claim will teach big banks and Wall Street brokerage firms that it’s unacceptable to prey upon innocent consumers and completely disregard their best interests and needs. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you sold or continue to hold the exchange traded funds at issue. 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.