Complex, synthetic exchange-traded products can come back to bite investors. Bloomberg tells
the recent horror story of the VelocityShares Daily 2x
, an exchange-traded note backed by Credit Suisse
The ETN's shares plunged 30 percent on Friday after the bank said it would begin to issue new shares.
The wire service uses the VelocityShares example as a warning about complexities of ETPs that fall outside of the usual U.S. ETF category.
Credit Suisse stopped issuing TVIX shares temporarily in February, citing "internal limits on the size of the ETN." The product's prospectus tells investors the issuer is "under no obligation to issue additional ETNs to increase the supply."
"This is a wake-up call," Samuel Lee
, an analyst with Morningstar
, told Bloomberg
. "People don't take seriously the options that issuers have" that can cause ETNs to suddenly stop behaving as they are intended.
The $1.7 trillion global ETP industry has attracted more than half of all US fund deposits for five years through December 31. According to the report, most ETPs in the US take the form of ETFs which track an index by holding underlying securities. Yet ETNs like this VelocityShares
offering are instead promises from the issuer.
Stay ahead of the news ... Sign up for our email alerts now