Securities Lawyers Blog
The investment attorneys with Gana Weinstein LLP are investigating investors who were inappropriately recommended leveraged exchange-traded funds (ETFs). ETFs, also called exchange-traded notes (ETNs) when backed by a note rather than underlining assets, are speculative and volatile investment offerings.
An ETF is a registered investment trust whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Shares of ETFs are typically listed on national securities exchanges and trade throughout the day at prices established by the market. These non-traditional ETFs differ from other ETFs in that they seek to return a multiple of the performance of the underlying index or benchmark or the inverse or opposite performance.
To accomplish their objectives non-traditional and leveraged ETFs typically contain very complex investment products, including interest rate swap agreements, futures contracts, and other derivative instruments. Moreover, non-traditional ETFs are designed to achieve their stated objectives only over the course of one trading session, i.e., in one day. This is because between trading sessions the fund manager for a non-traditional ETF generally will re-balance the fund’s holdings in order to meet the fund’s objectives and is known as the “daily reset.” As a result of the daily reset the correlation between the performance of a non-traditional ETF and its linked index or benchmark is inexact and “tracking error” occurs. Over longer periods of time or pronounced during periods of volatility, this “tracking error” between a non-traditional ETF and its benchmark becomes compounded significantly.