Exchange Traded Notes (ETNs)

Exchange Traded Notes, or ETNs, allow investors to place bets on the performance of a specific index. Instead of owning a piece of the index, investors purchase a bond from a bank or financial institution that is tied to any number of financial instruments, including emerging markets, commodities such as gold and oil, foreign currencies and even market volatility.

ETNs do not pay interest but instead pay a “distribution” determined by the performance of the index at the ETN’s maturity date. Most ETNs mature within 10 years of issuance, but in some instances maturity is as far as 40 years away. ETNs trade throughout the day at market price, similar to stocks or ETFs, but do not buy or hold assets.

Return on an ETN depends largely on price changes in the value of the ETNs index if it is sold prior to maturity or on the value of the distribution at maturity.

ETN investing comes with its own set of risk and the SEC has issued several warnings about the dangers of ETN trading for uninitiated or amateur investors. These risks include:

• Credit Risk – Because ETNs are unsecured, if the issuer defaults the investor will likely lose the entirety of their investment.
• Market Risk – ETNs trade on the market daily and thus are subject to market trends. As the value of the index tracked by the ETN fluctuates, so too will the value of the ETN.
• Liquidity Risk – Various market situations may cause the desirability of the ETN or the index it tracks to evaporate. If this occurs, investors will have a tough time unloading their ETNs.
• Price-Tracking Risk – ETNs are popular with high-volume traders and hedge funds. As such, there may be issues with tracking the minute-by-minute value of the ETN, including the potential to buy or sell at a loss.
• Holding-Period Risk – Many ETNs come with holding periods as short as one day. Long-term investment may lead to astronomical compounding of the ETN’s multiplier, which could lead to substantial losses.
• Call and Acceleration Risk – ETNs may also be subject to early redemption or an “accelerated” maturity date because they are issued at the discretion of the financial institution behind the ETN. An unlucky investor might find her ETN called at a price below what she paid for it.
• Conflicts of Interest – ETNs issuers may engage in trading activities that are at odds with optimal performance of the ETN.

ETNs are often only suitable for seasoned investors with a high risk tolerance. If you believe you were placed in an unsuitable ETN, or you believe your advisor or broker failed to disclose the risks of your ETN investment, you may be eligible for monetary recovery. Get a free consultation and see how you may recover your losses.

Two popular subsets of ETN are the leveraged and inverse ETN.

Leveraged ETNS offer “leveraged” exposure to the index they track, meaning they pay a multiple of the performance of that index. For example, an ETN that offers 2x leverage will deliver twice the performance of the index it tracks.

Inverse ETNs pay the opposite of the performance of the index it tracks, while a leveraged inverse ETN pays a multiple of the opposite of the index’s performance.

Some of these alternate ETNS achieve their performance goals daily and their leverage or inverse values are reset at the beginning of each new day of trading. Generally speaking, leveraged and inverse ETNs are not suitable as buy-and-hold investing tools. Instead, many experts view these instruments as wagers for short-term gain.

An exchange-traded fund, or ETF, is a combination of securities that tracks an underlying market index. These securities usually include stocks, bonds, and commodities. Market indexes represent a piece of the financial market and are often used to predict movements within the market.

Like ETNs, ETFs trade on the major exchanges and are typically easily bought and sold. Both of these investments are also meant to track an underlying piece of the market or asset, and both have fairly low expense ratios.

While ETFs own securities in the index it is tracking, ETNs place bets on the performance of the index without actually owning that index. ETNs carry an extra risk for this reason, because if the underwriter of the ETN goes bankrupt, the investor is at risk of losing their entire investment.

Since its inception, Gibbs Law Group has been on the forefront of investment fraud prosecution. We have recovered damages in cases alleging a variety of frauds and scams, including:

Medical Capital Litigation

This class action was brought on behalf of investors who suffered from an investment scam by four different financial entities. These entities disguised Medical Capital notes as reliable investments for their clients, which later turned out to be investments in a Ponzi Scheme. Gibbs Law Group served as Co-lead Council on this case and secured a settlement of $80 million on behalf of investors.

Towers Financial Corporation Noteholders Litigation

Gibbs Law Group served as liaison counsel in this class action brought against promoters and professionals who falsely marketed Towers Financial Corporation’s promissory notes. The Securities and Exchange Commission described this failed investment scam as the “largest Ponzi scheme in U.S. history.”

American Express Class Action Lawsuit

This class action as brought against American Express Financial Advisors who claimed to offer financial planning and advice tailored to client’s specific circumstances. In reality, these advisors provided “canned” financial planning, and gave clients general advice meant to direct them to specific mutual funds. Gibbs Law Group helped secure a $100 million settlement on behalf of American Express clients in this case.

Auction-Rate Securities Class Action Lawsuits

Gibbs Law Group served as co-lead counsel on a number of lawsuits against banks and broker-dealers who misrepresented the liquidity and risks of auction-rate securities. This misrepresentation resulted in the collapse of the auction rate securities market. The lawsuits helped spark the interest of state regulators, and many Wall Street firms eventually agreed to re-purchase auction rate securities from investors who bought directly from the banks.

H&R Block IRA Class Action Lawsuit

Gibbs Law Group served as co-lead counsel in a class action lawsuit against H&R Block. The case alleged that the company mislead customers in the sale of “Express IRAs.” Our law firm helped acquire a $19.4 million settlement to repay the fees charged under the Express IRA program.