The Financial Industry Regulatory Authority (Finra) has issued an investor alert warning of the risks that come with Exchange-Traded Notes (ETNs).
"ETNs are complex products and can carry a raft of risks," said Gerri Walsh, Finra's vice president for investor education. "Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks."
Finra described some of the risks associates with ETNs:
Credit Risk. ETNs are unsecured debt obligations.
Market Risk. As an index's value changes with market forces, so will the value of the ETN in general, which can result in a loss of principal to investors.
Liquidity Risk. Although ETNs are exchange-traded, a trading market may not develop.
Price-Tracking Risk. Investors should be wary of buying at a price that varies significantly from closing and intraday indicative values.
Holding-Period Risk. Some leveraged, inverse and inverse leveraged ETNs, are designed to be short-term trading tools, and the performance of these products over long periods can differ significantly from the stated multiple of the performance (or inverse of the performance) of the underlying index or benchmark during the same period.
Call, Early Redemption and Acceleration Risk. Some ETNs are callable at the issuer's discretion.
Conflicts of Interest. The issuer of the notes may engage in trading activities that are at odds with investors who hold the notes (shorting strategies, for instance).
-Jim McConville