The risks found in exchange traded notes are in sharp focus following the precipitous plunge in VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) — its price dropped about 50% in just a couple of trading sessions. [What Really Happened with TVIX]
Exchange traded notes have been attracting higher investment inflows alongside their exchange traded fund cousins, but industry observers caution that investors need to take time to differentiate between the two investment products.
The Financial Industry Regulatory Authority is investigating how companies are marketing ETNs, Reuters reports.
FINRA’s review is not limited to the TVIX crash, according to the story. “We have a review under way looking at a host of issues relating to ETNs and other complex products,” a FINRA spokeswoman said.
Analysts and investment advisors believe that ETN sponsors help fill in gaps in the investment landscape, reports Murray Coleman for MarketWatch. ETNs have brought in $2.4 billion in net inflows so far this year, or 71% more their overall inflows in 2011, according to Morningstar. ETNs are growing in popularity as a portfolio hedging tool, including products designed to capture market volatility, options strategies and leveraged stock and commodities.
“If someone needs quick exposure to an exotic part of the market that isn’t widely available through ETFs, then an ETN can fill a void,” Don Martin, president of Mayflower Capital, said. “But they’re probably going to remain best-suited to more speculative, short-term oriented traders.”
ETNs are unsecured debt instruments that reflect benchmark returns instead of holding the actual shares of securities. If the issuing bank falls on hard times, the ETN can close and leave investors with nothing.