WATCH OUT FLORIDA FIXED INCOME INVESTORS--ETNS (EXCHANGE TRADED NOTES) ARE DANGEROUS!

An ETN investor is lender to the issuer of the note, which promises to repay the investor's principal with interest that is supposedly gauged to the riskiness of the loan. But the issuer's payment obligation is unsecured, and if the issuer defaults, as Lehman Brothers did, the investor can lose his or her entire investment.

ETNs, like other alternative investments, have many risks and problems including illiquidity, high fees, and lack of transparency. ETNs have all these risks and problems plus credit (default) risk, skewed or abnormal returns and extreme volatility.

Despite being exchange traded, exchange traded notes, like other exotic exchange traded products, often lack a ready pool of buyers and sellers, making them illiquid. Illiquidity subjects an investment to wider price variances than liquid investments, as the bid and ask prices may be widely separated.

Exchange traded notes also come with high fees and expenses that are hidden from plain view. While Morningstar and CNNMoney list fees for exchange traded notes, "ETNs may calculate expenses differently or levy more charges-then bury that information in a pricing supplement to the prospectus," according to Penelope Wang ("Beware a Risky ETF Look-alike," CNNMoney). "ETN fees can be extremely hard to find and calculate," agrees Morningstar ETF analyst Samuel Lee.

Exchange traded notes have become the "go to" choice for extreme and exotic alternative investments, such as leveraged products like the VelocityShares Daily 2X VIX Short-term (TVIX), which purports to deliver double the ups or downs of the VIX index of market volatility. That product is meant for day trading, however, and many investors have been shocked to discover that the ETN does not closely track the index over a longer term.

"The one thing you can know for sure is that ETNs usually make money for the companies that offer them. For investors, not so much," writes Ms. Wang. Most investors should "steer clear" of exchange traded notes.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT UNITED STATES INVESTORS--JP MORGAN ETN STOPPED ISSUING NEW SHARES

JPMorgan has ceased issuing new shares of the master limited partnership exchange-traded note JPMorgan Alerian MLP Index ETN (Symbol: AMJ). The ETN posted a note on its web page explaining that it stopped issuing new shares because the maximum number of shares allowed had been reached ("Red flag at popular ETN," by Jason Kephart, InvestmentNews).

This means that the ETN is now likely to trade at a premium or a discount to the net asset value of the underlying assets. According to the article, the share price is likely to rise to a premium above net asset value, because of the demand for the hefty dividends of master limited partnerships. On the other hand, if the master limited partnership sector sells off, the ETN's share will probably trade at a discount.

This is a "red flag" because JP Morgan might resume issuing shares after a spike in the share price which could lead to a collapse of the share price down to the net asset value or lower. That is what happened earlier this year to investors in the Credit Suisse VelocityShares Daily 2X VIX Short-Term ETN (Symbol: TVIX). Credit Suisse stopped issuing new shares in February after which the shares doubled in value. When Credit Suisse resumed issuing shares in March, however, the ETN's share price took a nose dive that wiped out $172 million in one day.

Various regulators have said they are looking into sales practices involving ETNs. Exchange traded notes come with high fees and expenses that are hidden from plain view. While Morningstar and CNNMoney list fees for exchange traded notes, "ETNs may calculate expenses differently or levy more charges-then bury that information in a pricing supplement to the prospectus," according to Penelope Wang ("Beware a Risky ETF Look-alike," CNNMoney). "ETN fees can be extremely hard to find and calculate," agrees Morningstar ETF analyst Samuel Lee.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA FIXED INCOME INVESTORS--EXCHANGE TRADED NOTES ARE DANGEROUS!

Investor advocates are saying that more should be done to protect retail investors in Exchange-Traded Notes (ETNs). There is growing concern that with the rising popularity of ETNs, investors and financial advisers are getting into these products without fully understanding them or the risks involved.

ETN's are bank-issued debt securities. They were first brought to market six years ago to allow sophisticated investors to place bets on different parts of the market. Recently, however, retail investors have also started trading ETNs to gain access to certain market segments, such as those involving gold, silver, or natural gas. ETN offerings have grown in number over the past few years, with 212 ETNs now found on exchanges.

Unlike ETFs (exchange-traded funds), ETNs are not investment portfolios. They are contracts involving issuers that have agreed to pay investors returns equivalent to the investments being tracked.
ETNs issue unsecured securities that promise delivery of an index's return. The issuer usually uses derivatives connected to the index to cover their shareholder obligations. When an issuer cannot pay back the note, however, it is the investors that lose money.

An issuer may also choose to stop making or redeeming shares, which can cause the ETN to unhinge from the index or security it is supposed to track. Also, the notes are usually pegged to bonds, stocks, indexes and other underlying assets, which means sponsors can redeem or create shares to offset distortions in price that can occur when investors sell and buy them.

The US Securities and Exchange Commission (SEC) is reviewing the VelocityShares 2x Daily VIX Short Term ETN (TVIX) that collapsed last week, right after it climbed nearly 90% beyond its asset value. The drop came not long after Credit Suisse stopped issuing shares last month. Now, the Switzerland-based investment bank says it will start creating more shares.

Also known as TVIX, the VelocityShares 2x Daily VIX Short Term Exchange Traded Note is an exchange-traded note that seeks to provide two times the daily return of the VIX volatility index. With the note's value hitting nearly $700 million up from where it was at approximately $163 million in 2011 and now crashing down, the TVIX has taken investors for quite the ride.

The swaying price of the VelocityShares ETN shows the risks that can be created by the disruptions in their demand and supply. When Credit Suisse stopped putting out new shares, the divide between the price of the security and the value of the index it was tracking got even bigger, which led to a supply shortage even as there continued to be a record demand for volatility products that provide a hedge to counter losses on US equities.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT UNITED STATES ETN INVESTORS--EXCHANGE TRADED NOTES CAN BE EXTREMELY VOLATILE!

While the popularity of exchange traded notes ("ETNs") has surged, ETNs can be extremely volatile, and investors run the risk of losing their entire investment. ETNs reportedly hold $17.4 billion in assets, up from under $5 billion five years ago.

Exchange traded notes issued by Credit Suisse have recently traded at prices that were far above and below the true value of the ETN (See "2 ETNs' manic swings point out peril of use," by Jason Kephart, InvestmentNews). The true value of an exchange traded note (or any fund) is the net value of the tracked (or held) index or other asset. But when an asset gets hot, like ETNs, it can get overbought, and when something happens to dry up demand, it can get oversold. All of this can happen fast enough to make your head spin.

In the case of the Credit Suisse, investors apparently were not warned about, and did not notice or consider the fact that the price per share of the ETNs had risen to values that were far higher than the index they tracked. The dramatic run-up in price occurred when the issuing banks announced they would stop issuing shares of the much-desired ETNs (i.e., when it appeared that supply would dwindle, investor demand spiked and so did the price per share ultimately reaching a huge premium over the value of the index). Then the bank reversed itself and announced it would issue more shares of the ETNs. Demand plummeted and so did the price per share. Investors got whipsawed and lost their shirts.

Exchange traded notes are bank-issued promissory notes (IOUs) that track an index. They differ from exchange traded funds (ETFs) in that ETNs do not actually own or hold the index they track. They are simply notes in which the bank promises to pay the return of an index minus fees. The promise is simply an unsecured debt of the issuing bank. If the bank goes bankrupt, as Lehman Brothers did, the holders of its debt are left with nothing but claims against the bankruptcy estate, which may be worth little or nothing. Thus, ETN investors can lose their entire investment.

The Financial Industry Regulatory Authority Inc. (FINRA), the Securities and Exchange Commission (SEC) and Massachusetts' Securities Division are reportedly investigating the ETN debacle. Charles Schwab & Co. Inc. is said to be considering whether to require that investors be given more specific warnings about the risks of exchange traded notes.

Samuel Lee, an analyst at Morningstar Inc., commented: "It's kind of ridiculous that some of these products are actually out there, with the things they have hidden in the fine print."

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.