The plunge in shares of an exchange-traded note (ETN) backed by Credit Suisse Group underscores the growing risks that investors may unknowingly take on when they put their money into these complex financial products. The VelocityShares Daily 2x Short-Term ETN (TVIX), which aims to provide twice the daily return of the VIX volatility index, lost more than 60% of its value last month.
The startling free-fall raises serious questions – most notably whether retail investors who own exchange-traded notes like TVIX truly understand how the products actually work. ETNs are intended for short-term trading. When held for longer periods of time, investors leave themselves exposed to potentially huge financial losses. Unlike exchange-traded funds (ETFs) that have set fees and must alert investors when those fees change, an ETN’s can change daily.
Exchange-traded notes are debt securities issued by banks. The products first arrived on the investing scene in 2006, and were intended to be a mechanism for sophisticated traders to make bets on various market sectors.
State securities regulators, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are now looking into the volatility surrounding the VelocityShares, as well as the marketing efforts of firms that market it and other ETNs to investors.