Volatility Linked ETF Investors May Have Arbitration Claims

Recently, the Financial Industry Regulatory Authority (“FINRA”) ordered Wells Fargo & Co. to pay a $3.4 million fine in connection with sales practice issues related to recommendations of volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) to customers.  Specifically, FINRA determined that between July 2010 and May 2012, some Wells Fargo brokers affiliated with the company’s wealth management business recommended that their customers purchase volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) “without fully understanding their risks and features.”  In addition, FINRA indicated that Wells Fargo lacked the appropriate supervisory procedures and safeguards to facilitate sales of the volatility-linked investment products.

By their very nature, volatility-linked investments are designed to return a profit when the market experience choppiness (or volatility) and are not intended for ordinary investors.  In fact, when volatility-linked ETFs began rolling out to retail investors in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”

Investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading).  Furthermore, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs)- products that are beyond the understanding of ordinary retail investors.

As addressed in a March 2016 Barron’s article by Chris Dieterich – The Fear Gauge: Investors Should Avoid VIX ETFs – the stock market’s short-term roller-coaster ups and down have increased interest in exchange-traded products linked to the CBOE Volatility Index, or VIX.  Dietrich asserts that these products, “… offer the chance to catch lightning in a bottle but, like all hedging tools, are virtually guaranteed to lose money longer term.”  Dietrich goes on to describe how these VIX-related ETFs and ETNs are essentially “souped-up versions of short-selling bear-market funds, which ‘hedge’ stock holdings by rising when the major stock benchmarks sink.”

Aside from the risks associated with investing in derivatives, volatility-linked ETFs and ETNs also face certain structural limitations, including the fact that the funds are not directly tied to the VIX itself.  These products are linked to the futures market, and because futures contracts have a finite lifespan and regularly expire, the ETFs and ETNs may face additional difficulties in tracking the index’s performance.

The attorneys at Law Office of Christopher J. Gray, P.C. have considerable experience in representing investors who have sustained losses in non-traditional, or exotic investment products, including managed futures, structured notes, and non-traditional ETFs.   Investor facing losses due to an investment in a volatility-linked fund or note may contact our office at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.