What Are Exchange Traded Funds (ETFs)?

What Investors Need to Know About the Risks Involved with Non-traditional Exchange Traded Funds (ETFs)

What are exchange traded funds EFTs An exchange traded fund (ETF) is an investment fund that owns assets and then divides ownership into shares that trade on public stock exchanges. ETFs are an increasingly popular investment, as they combine some of the features of stocks and mutual funds into one financial product.

The underlying assets that are held by an ETF often include:

When used properly, ETFs can be an important part of a relatively conservative investment portfolio. That being said, ETFs can be extremely risky. Indeed, as these funds hold widely variable underlying assets, they come with sharply differing levels of risk.

Recent FINRA Actions Involving Unsuitable Investments in Non-traditional ETFs


Richard William Martin (CRD# 723309)

According to FINRA Disciplinary Proceeding No. 2013035817701, broker Richard William Martin violated NASD Rule 2310 and FINRA Rules 2111 and 2010 by not having a reasonable basis to recommend, for long-term holding, non-traditional exchange traded funds (“Non-traditional ETFs”) to his customers.

Daniel Joseph Hushek (CRD#: 4250117)

According to FINRA AWC letter No. 2013035817702, advisor Daniel Joseph Hushek failed to adequately supervise the sales practice of a registered representative who recommended and engaged in unsuitable trading of non-traditional exchange traded funds (“ETFs”). As a result of the foregoing Hushek violated NASD Rule 3010 (for conduct prior to December 1, 2014), FINRA Rule 3110 (for conduct on or after December 1. 2014), and FINRA Rule 2010.

John Blakezuniga (CRD#: 1014886)

According to FINRA AWC letter No. 2016048453601, John Blakezuniga recommended approximately 1,280 transactions in inverse and inverse leveragedExchange Traded Funds (“non-traditional ETPs”) in 85 customer accounts without a reasonable basis for the recommendations. By doing so, Blakezuniga violated NASD Rule 2310 and FINRA Rules 2111 and 2010.

Network 1 Financial Securities Inc. (CRD# 13577)

According to FINRA AWC letter No. 2015046575201, Network 1 Financial Securities failed to properly supervise approximately 29 of its registered representatives who traded Non-Traditional ETFs in 167 customer accounts, and in so doing violated NASD Rule 3010 and FINRA Rules 3110 and 2010. These representatives executed 645 Non-Traditional ETF transactions totaling approximately $48 million.

JAY DEE JORDAN (CRD#: 1776666)

According to FINRA AWC letter No. 2015046728802, between June 1, 2012 and March 31, 2016 Jay Dee Jordan recommended and engaged in unsuitable trading in nontraditional ETFs in 84 of his customers accounts. These trades, which were unsuitable from both a reasonable-basis and a customer-specific perspective, collectively resulted in customer losses exceeding $8 million.

James Dresselaers (CRD#: 1106109)

According to FINRA AWC letter No. 2016048675901, between 2008 and 2011, H. Beck’s registered representative James Dresselaers recommended to the Firm’s customer, EB, investments in several nontraditional exchange-traded funds (“ETFs”) and stocks issued by companies in the metals and mining sector. These recommendations were unsuitable for EB, a professional athlete with no investment experience, a moderate risk tolerance, and an investment objective of long-term growth.

If you’ve invested and lost money because of unsuitable investments in ETFs recommended by your registered financial advisor, the securities fraud attorneys at the Sonn Law Group are interested in hearing from you. We invite you to contact us online to schedule a free review of your case.

See more recent disciplinary actions involving leveraged ETFs…


Financial Advisors Must Protect Their Clients From Unsuitable ETFs

Brokers and brokerage firms have a legal duty to look out for the best financial interests of their clients. One aspect of this duty is ensuring that their customers are only taking on the appropriate amount of risk. Unfortunately, all too often, registered investment advisors (RIAs) push their clients into unsuitable and risky exchanged traded funds. If you lost money because of risky ETF investments, you should speak to an experienced unsuitable investments lawyer immediately. Your lawyer will be able to review the specific facts of your case to determine if you have a viable legal claim.


Five ETF Risks You Must Consider


  1. Market Risk

It is a basic fact in the life of an investor: Markets go up and markets go down. At any given moment, the market could turn in a very bad direction. Your financial advisor has a duty to structure a portfolio that is consistent with your needs and that reasonably protects you against temporary market downfalls.

One of the basic tools that is used to do this is diversification. As ETFs are made up of a variety of different assets, many people believe that they are inherently diversified. This is false. If your portfolio is made up entirely of stock market-tracking ETFs, you will get crushed during a market downturn. ETF investors need to be prepared for market risks.


  1. Poor Composition

ETFs are only as good as their component parts. Even when ETFs are designed with the same goal in mind, they can end up with vastly different results. For example, an ETF that tracks biotech stocks may perform far better in any given year than does a different ETF that also tracks biotech stocks. The composition of assets within an ETF matters. Knowing that the product is made up a stocks or bonds from a particular sector should not be the end of your research.


  1. Leverage

Many ETFs are now traded with leverage. The effect of leverage is simple: It increases the exposure to and impact of any change in the value of the underlying assets. For example, if you owned a 2X leveraged exchange traded fund that tracked the S&P 500, and the S&P 500 lost 2 percent of its value, you would actually lose 4 percent of your value. With leverage, any effect will be multiplied.

Investors need to be extremely careful with leveraged ETFs, as in many cases these investments track an already volatile basket of goods. Notably, the Securities and Exchange Commission (SEC) recently moved towards approving 4X leveraged ETFs.


  1. Complexity and Exotic Exposure

ETFs are now coming onto public markets that provide investors exposure to increasingly exotic investment opportunities. Generally, the more exotic, niche or narrow an ETF is, the more risk there is contained within. For the vast majority of investors, complex ETFs are simply unsuitable investments. For example, a leveraged ETF that shorts the Australian Dollar is almost certainly an ETF that would expose your portfolio to undesirable, unnecessary risk.


  1. Fund Closure

ETFs do not necessarily exist forever. Indeed, an investment fund could potentially be shut down at any point in time. When this happens, the fund will be liquidated and investors will be paid out in cash. Typically, when an ETF is shut down, the value of the assets tends to drop as soon as a closure is announced. Further, an ETF liquidation could have adverse tax consequences for investors.


Contact Our Office Today

At the Sonn Law Group, our dedicated investor losses attorneys have helped many people recover fair compensation. If you lost money investing in ETFs and you believe that you were a victim of fraud or broker negligence, we are standing by, ready to help. Please contact us today at 844-689-5754 or via email to set up your free, no obligation initial legal consultation.