Articles Posted in ETF

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financial charts and stockbrokerOn December 8, 2017, the Securities and Exchange Commission (“SEC”) issued a Cease-and-Desist Order (“Order”) against Ameriprise Financial Services, Inc. (“Ameriprise”) in connection with allegations that Ameriprise and its employees or agents purportedly misrepresented the performance of certain ETF strategies.  Specifically, the SEC’s investigation focused on sales of AlphaSector strategies by ETF manager F-Squared Investments, Inc. (“F-Squared”).  The F-Squared AlphaSector strategies, which were based upon an algorithm, were sector rotation strategies designed to issue a “signal” as to whether to buy or sell certain ETFs, that together, comprised the industries in the S&P 500 Index.

Pursuant to the Order, the SEC has alleged that F-Squared materially miscalculated the historical performance of its AlphaSector strategies (from April 2001 to September 2008) by incorrectly implementing signals in advance of when such signals could have occurred.  In addition, the SEC alleged that F-Squared relied upon hypothetical and back-tested historical performance that was purportedly inflated substantially over what actual performance would have been had F-Squared applied the signals accurately.

In December 2014, F-Squared agreed to pay a $35 million fine to the SEC, and furthermore, admitting to wrongdoing regarding falsifying performance numbers in its advertising and marketing materials.  See In the Matter of F-Squared Investments, Inc., Admin. Proceeding No. 3-16325 (Dec. 22, 2014).  By July 2015, F-Squared filed for Chapter 11 bankruptcy protection.

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Money BagsInvestors who purchased shares in a leveraged inverse ETF or mutual fund upon the recommendation of their financial advisor may have arbitration claims.  In today’s investment environment, many retail investors have been coaxed into investing in financial products beyond the traditional universe of stocks, bonds, and bank deposit products such as CDs.  One such alternative or non-conventional investment product that has gained in popularity over the past decade with retail investors is the leveraged inverse ETF (more commonly referred to as an “ultra short fund”).

Essentially, leveraged inverse funds seek to deliver the opposite of the performance of the index or benchmark that they track.  These ultra short funds employ a strategy akin to short-selling a stock (or basket of stocks), in conjunction with employing leverage, and in so doing these funds seek to achieve a magnified return on investment that is a multiple of the inverse performance of the underlying index.

For example, the ProShares UltraPro Dow30 ETF (NYSE: SDOW) is structured to provide a return that is -3% of the return of the underlying index, the Dow Jones Industrial Average.  Thus, if the Dow Jones were to lose 1% in value, SDOW is structured to gain 3%.  While in theory this might seem a straightforward proposition, the fact is that such ultra short funds are exceptionally complicated and risky financial products.

The greatest risk associated with leveraged inverse ETFs involves purchasing these products in a buy-and-hold scenario.  Put another way, these products are not designed to be held for more than single trading day, and it is for this reason that such funds should only likely be purchased by professional investors for hedging and day trading purposes.  To understand why investing in ultra short ETFs or mutual funds for more than single trading day (buy-and-hold) is likely unsuitable, it is helpful to review the summary prospectus for one inverse ETF, ProShares Short S&P 500 (NYSE: SH), and its disclosure concerning “compounding risk”:

The Fund has a single day investment objective, and the Fund’s performance for periods greater than a single day will be the result of each day’s returns compounded over the period, which is likely to be either better or worse than the Index performance times the stated multiple in the Fund’s investment objective, before accounting for fees and fund expenses. Compounding affects all investments, but has a more significant impact on an inverse fund. Particularly during periods of higher Index volatility, compounding will cause results for periods longer than a single day to vary from the inverse (-1x) of the daily return of the Index. This effect becomes more pronounced as volatility increases.

Aside from compounding risk, the other obvious risk associated with leveraged inverse funds has to do with their leverage, or their use of derivatives such as futures contracts to magnify their exposure to the underlying index or benchmark.  For the uninformed and unsophisticated retail investor, it is likely an unsuitable investment strategy to purchase a financial product with 3X leverage.  This is because in the event that the investment theme does not pan out, any losses will be magnified by the corresponding degree of leverage.

As of early October 2017, the following leveraged inverse ETFs are among the worst performing ETFs this year:

UVXY  ProShares Ultra VIX Short-Term Futures ETF -88.7
TVIX  VelocityShares Daily 2x VIX Short-Term ETN -88.6
LABD  Direxion Daily S&P Biotech Bear 3X Shares -77.0
VIXY  ProShares VIX Short-Term Futures ETF -62.5
VXX  iPath S&P 500 VIX Short-Term Futures ETN -62.4
VIIX  VelocityShares Daily Long VIX Short-Term ETN -62.4
SOXS  Direxion Daily Semiconductor Bear 3x Shares -61.8


When a financial advisor recommends an investment to a customer, the broker and his or her firm has a duty to first conduct due diligence on the investment.  In addition, pursuant to the rules and regulations set forth by the Financial Industry Regulatory Authority (“FINRA”), the financial advisor, and by extension his or her firm, must seek to ensure that they conduct a suitability analysis in order to determine if the investment being recommended is suitable for the investor in light of certain factors, including the customer’s age, risk tolerance and stated objectives, net worth and income, and degree of sophistication with investing.

If you have invested in any leveraged inverse ETFs or mutual funds, including the above referenced ultra short funds, you may be able to recover losses sustained in FINRA arbitration.  Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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Cage MoneyRecently, the Financial Industry Regulatory Authority (“FINRA”) ordered Wells Fargo & Co. to pay a $3.4 million fine in connection with sales practice issues related to recommendations of volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) to customers.  Specifically, FINRA determined that between July 2010 and May 2012, some Wells Fargo brokers affiliated with the company’s wealth management business recommended that their customers purchase volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) “without fully understanding their risks and features.”  In addition, FINRA indicated that Wells Fargo lacked the appropriate supervisory procedures and safeguards to facilitate sales of the volatility-linked investment products.

By their very nature, volatility-linked investments are designed to return a profit when the market experience choppiness (or volatility) and are not intended for ordinary investors.  In fact, when volatility-linked ETFs began rolling out to retail investors in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”

Investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading).  Furthermore, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs)- products that are beyond the understanding of ordinary retail investors.

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The Financial Industry Regulatory Authority (FINRA) recently fined LPL Financial $10 million fine and ordered it to pay $1.7 million in restitution to investors who lost money with LPL brokers.  The charges levied by FINRA alleged widespread supervisory failures involving securities such as nontraditional exchange-traded funds, variable annuities and non-traded real estate investment trusts (or REITs).

15.6.10 moneyand house in handsLPL’s failure to supervise sales of nontraditional ETFs continued into 2015, according to FINRA.   FINRA also alleged that LPL failed to have adequate supervisory systems and guidelines for sales of nontraded REITs from January 2007 to August 2014. LPL consented to the fine without admitting or denying the charges.

This was not LPL’s first regulatory issue concerning lack of supervision concerning high-commission investments such as non-traded REITs.  In March 2014, FINRA fined LPL $950,000 for supervisory deficiencies related to sales of a wide range of alternative investment products. These include nontraded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments.

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Oil prices have rapidly tumbled to under $50 a barrel, from well over $100 a barrel, leaving prices at their lowest level since 2009. As a result of the plummet in oil prices, some investors whose portfolios were concentrated in investments whose value is linked to the price of oil or other energy products have lost significant sums. Such investments may include private placements, stocks, and ETFs. On the private placement side alone the Securities Exchange Commission (SEC), has stated that since 2008, approximately 4,000 oil and gas private placements have attempted to raise nearly $122 billion in investor capital. However, research has shown that some of these oil and gas private placements pose enormous risks and, a significant majority of the oil and gas funds offered by some sponsors have lost money (even before the recent drop in oil prices).

15.2.24 oil rigs at sunsetLeveraged ETFs

In addition to the inherent risks of such investments, some investors’ portfolios may be over-concentrated in oil and gas stocks or ETFs. Some of these ETFs may be leveraged or non-traditional ETFs. These types of funds will tend to rise or fall in value even more rapidly than the price of oil and gas, due to internal leverage, or the borrowing of money by the funds to increase their exposure energy prices.

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Lawyers are investigating claims on behalf of investors who suffered significant losses in exchange-traded notes (ETNs) and exchange-traded funds (ETFs) issued by Credit Suisse and other full-service brokerage firms.

ETF, ETN Investors Could Recover Losses

According to Bloomberg, the $45,000 loss suffered by Jeff Steckbeck in TVIX, a Credit Suisse Group AG note, has set off a probe by the Securities and Exchange Commission. Reportedly, ETNs became more popular with the TVIX in February 2012. That month, Credit Suisse stopped selling the ETN and rising demand caused the investment to veer up to 89 percent from the index. When Credit Suisse began issuing the notes again in March of that year, a FINRA warning cautioned investors that ETNs could trade at a price that was higher than their underlying index.

Bloomberg data indicates that the estimated initial value of the securities is typically 2 to 4 percent less than the price investors paid. Exchange-traded notes like TVIX mimic assets through the use of derivatives and their value is based on volatility shifts in the market. However, the ETN market is small beans compared to the ETF market, which has around $2.4 trillion in assets.

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Our recent blog post, “Berthel Fisher and Affiliate Fined Regarding Sales of ETFs and Non-Traded REITs,” reported that in February the firm had been fined $775,000 by the Financial Industry Regulatory Authority (FINRA). The FINRA fines addressed alleged supervisory failures, including failure to properly supervise the sale of alternative investments like leveraged and inverse exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs). One claim has already been filed by investment fraud lawyers on behalf of a retired woman in Minnesota.

Claims Against Berthel Fisher for Unsuitable Sale of Alternative Investments Begin

According to the claim, the woman was sold non-traded REITs and other alternative investments by Jonathan Pyne, a broker for Berthel Fisher. The claim argues that her age and low risk tolerance made the investments unsuitable for her. The investments included:

  • Inland American Real Estate Trust
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Securities fraud lawyers are currently investigating claims on behalf of the customers of Berthel Fisher & Co. Financial Services Inc. and Securities Management & Research Inc., a Berthel Fisher affiliate in Marion, Iowa. In February, the Financial Industry Regulatory Authority (FINRA) announced that it had fined the two a total of $775,000 for supervisory deficiencies. The deficiencies included Berthel Fisher’s failure to properly supervise the sale of leveraged and inverse exchange-traded funds and non-traded real estate investment trusts.

Berthel Fisher, Affiliate Fined Regarding Sales of ETFs and Non-traded REITs

According to the FINRA investigation’s findings, Berthel Fisher did not have adequate written procedures and supervisory systems in place from January 2008 to December 2012 for the following alternative investments:

  • Non-traded REITs
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Securities fraud attorneys are currently investigating claims on behalf of customers of full-service brokerage firms for unsuitable sales of leveraged and inverse ETFs, or exchange-traded funds. On January 9, the Financial Industry Regulatory Authority (FINRA) announced that it ordered Stifel, Nicolaus & Co. Inc. and Century Securities Associates Inc. to pay $475,000 in restitution and $550,000 in fines regarding the sales of leveraged and inverse ETFs to 65 customers.

Unsuitable ETF Sales Lead to Restitution for Investors

Stifel and Century, both affiliate broker-dealers based in St. Louis, are owned by Stifel Financial Corp. According to stock fraud lawyers, leveraged and inverse ETFs are designed to meet daily objectives and “reset” each day. As a result, the performance of these investments can diverge from the performance of the underlying benchmark or index very quickly. Naturally, this problem is exacerbated in volatile markets.

According to securities fraud attorneys, because of the nature of these investments, leveraged and inverse ETF investors can suffer enormous losses, even if there is a gain in the index performance over the long-term.

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Investment fraud lawyers are currently investigating claims on behalf of investors who suffered significant losses in inverse and leveraged exchange-traded funds or ETFs. Inverse and leveraged exchange-traded funds are supposed to meet daily objectives. As a result, their performance can drop rapidly relative to the underlying index or benchmark.

Exchange-traded Fund Investors Could Recover Losses

According to securities arbitration lawyers, even ETFs with a long-term gain in index performance can result in significant losses for investors. When markets are volatile, the problem is often exacerbated. As a result, ETFs are unsuitable for many investors.

Reportedly, the Financial Industry Regulatory Authority recently ordered J.P. Turner & Co. to pay restitution to 84 clients regarding the unsuitable recommendation and sale of inverse and leveraged ETFs. J.P. Turner did not admit or deny the charges but agreed to pay $707,559 in restitution to settle the charges. The charges also included allegations of excessive mutual fund switches, failure to provide adequate training regarding ETFs and failure to implement an adequate supervisory system.

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