Exchange Traded Notes and Exchange Traded Funds

Exchange Traded Notes, or ETNs, are unsecured debt instruments that trade on a public exchange. ETNs track an index or sector of the market and behave much like stocks. ETNs have become popular in recent years and many financial institutions have issued ETNs to give investors exposure to specific market sectors.

Exchange Traded Funds, or ETFs, are generally low-cost alternatives to mutual funds and consistent of a basket of underlying stocks or bonds. ETFs can also be sector specific. For example, the QQQ is an ETF specifically focused on technology stocks that are listed on the NASDAQ.

Although ETFs and ETNs have many similarities, their legal structure is different. An ETF is an equity-like legal structure whereas an ETN is a bond-like structure but, unlike a bond, does not pay a fixed rate of interest.

One of the more popular ETNs is the Barclays Bank IPATH Series B S&P 500 VIX Short Term Futures Exchange Traded Note, which trades under the symbol “VXX.” The VXX is a speculative exchange traded note that is designed to provide investors with exposure to futures contracts on the Chicago Board of Options Exchange (CBOE) Volatility Index known as the “VIX.” For many years, the VIX has been interchangeably referred to as the “fear index” because it is intended to use technical data to capture an emotional consensus about the short-term direction of the equities market. It is often used as a benchmark to guide short-term trade activity among sophisticated institutional traders. Thus, investors who trade the VXX will experience similar portfolio increases/decreases than if they were able to trade the VIX. Investors who purchase shares of the VXX are predicting an increase in market volatility. If that prognostication proves correct, the VXX trade will turn profitable. If volatility decreases, the value of VXX shares will also decrease and the investor will lose money on the trade.

Many ETNs are internally leveraged, which means that the risk of loss is enhanced. Other ETNs are structured so that they provide investors with twice or even three times the performance of the underlying index or benchmark or, alternatively, are inversely correlated to the market. In other words, for every $1 of performance in an underlying benchmark, the ETN investor can expect to experience $2 or $3 (i.e., 2x or 3x) of performance in their account. If an inverse ETN, the investor

In recent years, FINRA has issued Investor Alerts, cautioning investors:

Some ETNs offer leveraged exposure to the index or benchmark they track. This means that they promise to pay a multiple of the performance of the underlying index or benchmark. For example, an ETN that offers two times—or “2x”—leverage promises to pay twice the performance the index it tracks.

Inverse ETNs offer to pay the opposite of the performance of the index or benchmark they track and leveraged inverse ETNs seek to pay a multiple of the opposite of the performance of the index or benchmark they track. Some leveraged, inverse or leveraged inverse ETNs are designed to achieve their stated performance objectives on a daily basis and “reset” their leverage or inverse exposure on a daily basis. Given the daily resetting of its leverage factor, an ETN that is set up to deliver twice the performance of a benchmark on a daily basis will not necessarily deliver twice the performance of that benchmark over longer periods such as weeks, months or years. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the stated multiple of the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.

Generally, leveraged and inverse ETNs are designed to be short-term trading tools and are not intended for buy-and-hold investing. Other leveraged, inverse or leveraged inverse ETNs can have monthly resets or even no resets, so it is important to distinguish one type from another and understand how their performance may differ.


FINRA has also sanctioned several brokerage firms and Financial Advisors regarding the unlawful and unsuitable sale of ETNs and ETFs. Often times, this relates to the failure to disclose risks associated with ETNs and ETFs.

If your Financial Advisor has recommended ETNs and ETFs and you have experienced investment loss, you may be entitled to pursue claims for recovery in FINRA arbitration. Contact the Wolper Law Firm at 800.831.9452 for a free consultation to discuss your legal options.

Attorney Matthew Wolper

Matt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]