Securities Lawyers Blog
Our firm is investigating potential securities claims against brokerage firms for sales practice violations related to the recommendations of oil & gas and commodities products such as exchange traded notes (ETNs), structured notes, private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and individual stocks.
One investment that advisors may be recommending to clients in order to gain exposure to oil is the iPath S&P GSCI Crude Oil Total Return Index ETN (Symbol: OIL). OIL is a speculative ETN that attempts to “reflect[] the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract.” Brokers may be recommending OIL for long-term holding when, in fact, OIL is a risky ETN that is only appropriate for short-term investment speculation on the price direction of oil.
As Morningstar has written, “Due to the extremely specialized exposure of the fund, investors should only consider it for a small position in the satellite portion of a broadly diversified portfolio.” MorningStar also explained how the futures invested in the fund make the investment inappropriate for long-term holdings and how the price of the fund is not related to the price of oil. “For example, in 2013 OIL increased 5.6%, close to WTI’s spot price gain of 6.9% for the year. However, over the trailing five-year period OIL lost 1% annualized, compared with an annualized gain of more than 20% for spot WTI over the same period.”
In other words even if the price of oil increases on an annualized basis by 20% an investor in OIL can still lose money. Investors often times do not realize that index ETNs designed to track certain assets may not be successful in doing so and may be subject to different types of risks other than those of the underlining value of the asset.
Another area where investors may not understand the risk of the oil related investment are non-traditional ETFs. Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs are also used to earn the inverse result of the return of the benchmark. Non-Traditional ETFs are generally designed to be used only for short term trading – in many cases for only holding the security for a single day.
Because of these risks, The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and FINRA has stated that Non-Traditional ETFs are typically not suitable for most retail investors. Consequently these funds typically have very limited uses and in many cases are completely inappropriate for retail investors. Increasingly, brokerage firms are prohibiting the solicitation of these investments to its customers due to suitability concerns. Thus, investors who invested in non-traditional ETFs linked to oil such as VelocityShares 3x Long Crude Oil ETN (Symbol: UWTI) may not have understood the risks they were taking.
The investment fraud attorneys at Gana Weinstein LLP represent investors who have suffered securities losses due to the mishandling of their accounts. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.