Oakes & Fosher is presently investigating a series of investment products sold by registered brokers at UBS Financial Services Inc. These products were a series of exchange traded notes, also known as ETNs, that UBS titled ETRACs. Oakes & Fosher believes that these ETN products were recommended to numerous investors not financially suited for them. We are very interested in hearing from investors who believe this may be them.
Exchange Traded Notes
An ETN is a debt security in which the purchaser is essentially providing the issuing company a loan as opposed to purchasing actual equity in the company. They are similar to bonds in this fashion. However, unlike bonds, the amount the investor is to be repaid when the security matures actually fluctuates over the life of the investment. An ETN is directly linked to the performance of a particular index. When the ETN is liquidated, the investor is supposed to then be paid back the current value of said index as opposed to the amount of the original loan.
UBS’ ETRAC Products
- ETRACS Monthly Pay 2xLeveraged U.S. High Dividend Low Volatility ETN (HDLV)
- ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHD)
- ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN (DVHL)
- ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFL)
- ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFZ)
- ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL)
- ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (LBDC)
- ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL)
- ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MRRL)
- ETRACS Monthly Pay 2xLeveraged MSCI US REIT INDEX ETN (LRET)
- ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (MLPQ)
- ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (HOML)
- ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B (MLPZ)
- ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP)
- ETRACS ProShares Daily 3x Inverse Crude ETN linked to the Bloomberg WTI Crude Oil Subindex (WTID)
All of these ETRAC exchange traded notes covered particularly volatile sectors of the market that cover real estate products known as REITs, speculative energy sector securities, and speculative business development companies that provide start up financing to companies rejected by traditional lenders.
The Risks Associated With These ETRAC Products
Many investors are unaware of how truly speculative these investments are. While the investor is supposed to be repaid the current value of the market index the particular ETRAC was linked to, the company’s ability to repay is entirely dependent upon its financial status. Even if said status does not match the index’s value. If the issuing company falters over the life of the investment, the amount they are able to repay may be dramatically lower than the value of the index. If the company is able to repay anything at all that is. Investors may be dumbfounded to find their investment is next to worthless while spending so long watching the index rise in value.
These ETRAC companies played it incredibly fast and loose with investor funds. Not only were these products linked to incredibly volatile market indexes, but the products were actually purchased on leverage. This adds an entire new tier of risk as it introduces the possibility of multiplying an investor’s losses. When an ETN like these ETRAC products utilizes leverage, they are essentially using borrowed funds to increase the possible reward of a rising index. However, with this increased possibility for reward comes an increased risk. A traditional ETN mirrors the index directly. The value of the note is identical to the value of the index. However, when leverage is introduced, a customer’s earnings could be double or triple the value of the index. However, this means that their losses could also be doubled or tripled should the value of the index decline. Essentially, these products invest in risky market indexes, while employing even riskier investment tactics, which can very easily lead to a loss of principal
How Did COVID-19 Affect These Products?
The COVID-19 Pandemic has drastically affected just about every aspect of the global market. While the market is on decline, this is especially true for the more volatile market indexes that these ETRAC products were linked to–such as REITs, BDCs, and energy sector securities. However, since these products utilize leverage, they have fallen much lower than their respective indexes. Even if the indexes were to rise again during the life of the investment, the hit that these investments have taken during the COVID-19 Pandemic may have left them permanently damaged and unable to repay their issued notes. However, these note holders won’t ever even get the chance to see how the investment turns out as they are being forced to abandon ship. Because of the global market crash, these ETRAC companies are enforcing mandatory redemptions. This means that the life of the exchange traded note has been cut short, and investors are forced to liquidate their notes for the current index value, which, as already stated, is incredibly low due to this global pandemic. These mandatory redemptions have caused investors to incur over a 60 percent loss in principal. While UBS Financial Services, and other advocates of these products, will claim that this was just a direct result of the market crash, this is actually not the case. The market crash simply revealed these products for what they actually are. Incredibly risky investments that forced investors to abandon ship when things got rough. A proverbial house of cards among stones houses.
Oakes & Fosher Can Help
Less than scrupulous securities brokers motivated to make the sale often rely on omitting or misrepresenting material facts about investments. Oakes & Fosher believes that UBS brokers misled financially unsuited investors into believing these ETNs were suitable for them. Investments like these should never be recommended to individuals who are retired, have higher liquidity needs, have a lower risk tolerance, or have more conservative investment objectives. Oakes & Fosher dedicates its entire legal practice to helping investors across the nation. If you, or someone you know, have lost money being invested in any of USB’s ETRAC ETNs, please contact Oakes & Fosher for a free and private consultation. Oakes & Fosher handles cases on a contingency basis, which means there are no fees charged unless we collect for you.