“We’re biased in favor of big-cap growth right now, and this allows us to inject an extra quantity of big-cap growth into the portfolio,” Ken Fisher said in a telephone interview at the time.

Even with the shift to ETNs, the Fisher Global Total Return strategy for private clients has underperformed its benchmark annually more than half the time from 2013 to 2018.

For ETNs overall, it has been a painful few years. Once heralded as a great way for ordinary folk to invest, ETNs have shrunk to less than 1% of the $4 trillion ETF industry amid a slew of negative headlines.

In 2018, amateur investors were eviscerated when an ETN issued by Credit Suisse shuttered following the jump in the CBOE Volatility Index, sometimes called the Wall Street “fear gauge.” The year before, the Financial Industry Regulatory Authority censured Wells Fargo & Co. for “unsuitable recommendations” of certain ETNs to retail customers. The company accepted the penalty, without admitting or denying the agency’s findings.

The Securities and Exchange Commission is considering how to better differentiate plain vanilla ETFs from leveraged products, which comprise half of ETNs. Customers can confuse them with low-cost and popular ETFs, which are essentially baskets of securities that trade like stocks. Even the banks that issue these notes are getting cold feet, as new regulations on capital place a premium on their balance sheets.

‘Enhanced’ Strategies
ETNs emerged about 13 years ago to give investors access to markets such as currencies or commodities, or as a more tax-efficient way to invest in certain types of companies. For a money manager like Fisher, there’s a different appeal: leverage.

While much of Fisher’s recent cash exodus has come from large pension funds, wealthy individuals and families make up the lion’s share of its assets, with more than $69 billion invested across more than 65,000 separate accounts. That means Fisher would find it hard to enhance its returns using borrowed money, as a hedge fund might. But the firm can use ETNs, since they can be bought and sold for multiple clients as easily as a stock.

Fisher currently uses these notes to get what many of the offering documents describe as “enhanced” exposure to large-cap growth stocks in the U.S., global high-yield bonds and Europe’s 50 largest companies, data compiled by Bloomberg show.

Investment counselors at Fisher were taught to downplay the risks involved with ETNs by calling them “enhanced” instead of “leveraged,” when discussing them with clients, according to former employees who asked not to be identified for fear of retaliation. The firm justified this approach by saying that ETNs weren’t leveraged in the common use of the word since it couldn’t lose more than it invested, these people said.

Dillard, the Fisher spokesman, disputed that counselors downplay the risks of ETNs. The notes are broadly diversified because they are designed to deliver twice the total return of a market index, he said, and are less volatile than most individual stocks.