NON-TRADITIONAL EXCHANGE TRADED FUNDS (ETFs)
What are Non-Traditional Exchange Traded Funds (ETFs)?
Non-traditional ETFs are complex financial products designed to achieve a specific performance result on a daily basis. It should be noted here that non-traditional ETFs are neither good nor bad — their value depends on how they are used and who they are used for.
Risks of Non-Traditional ETFs
Complex strategies are been employed by non-traditional ETFs such as leverages, inverse, leveraged-inverse, which essentially compounds the risk that investors are exposed to. For that reason, brokers are required to assess the suitability of such investment products on a customer by customer basis rather than suggesting them to all investors.
The Financial Industry Regulatory Authority (FINRA) has cracked down on some firms about the risks associated with investing on non-tradition ETFs and has put out information on the its website. Some Non-Traditional ETFs have low trading volume, which may affect an investor’s ability to sell shares quickly.
Also, non-Traditional ETFs uses different derivatives to look for profit from the depreciation in the value of underlying index, commodity, currency and assets. This in turns make them focus on daily investment returns, and their performance over a long period of time may differ significantly from their stated daily objective. Firms can incur a huge loss even if the index shows a profit at the long run.
Furthermore, it has since emerged that most of the people who lost their money in the non-traditional investment products were not advised as to the risks involved. For those reasons, authorities and law firms have requested investigations as brokers and brokerage firms need to have advised their investors of the risks involved before putting their money to work.
Non-Traditional ETFs are complex products with potential for huge loss of principal and are not appropriate for investors. The use of leverage can magnify any price movements, resulting in an explosive and significant loss of capital.
FINRA crackdown
In 2010, the first high frequency trading case in the U.S against Trillium Brokerage Services, LLC, fining the company $2.3 million for continuously entering an inappropriate layered, non-bona fide, market moving orders to create an untrue presence of buy- or sell-side pressure.
Also, in 2012, FINRA sanctioned Citigroup global markets, LLC, Morgan Stanley and Co LLC; UBS Financial services; and Wells Fargo advisors LLC over more than $9.1million dollars for selling leveraged and inversed ETFs without reasonable supervision and for not having a reasonable basis for recommending the securities.
In 2019, FINRA also fined Northcoast Securities stockbroker, Dominic Anthony Trapiano for trying to sell non-traditional ETFs while knowing very well they were not good for investment. Victims of the brokerage firm were later paid $1.5 million due to the firm selling ETFs without reasonable grounds.
