Articles Tagged with ETP; Exchange-Traded Products; VIX; Volatility Index

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers who have failed to recognize their clients’ need for lower-risk portfolios. It’s no secret that the COVID pandemic has made the stock and bond markets more volatile. When the outbreak first hit markets, it triggered a massive sell-off in everything from blue chip stocks to municipal bonds.

Yet many broker-advisers failed to protect their clients, keeping them in high-risk portfolios that lost money. Even though they constantly make claims to the contrary, almost no advisor can time markets to fully protect investors. Few saw the pandemic coming, or the devastating impact it would have on the world economy.

After the stock market peaked on February 19, 2020, it dropped 34% in a month, hitting a bottom on March 23. But by June, the market had bounced back, surging 39%. Then, on Oct. 28, the Dow dropped more than 900 points as COVID cases again surged worldwide in a second, record-setting wave. Who could have predicted such stomach-churning volatility? Investors who were risk averse and needed to protect principal – and were overexposed to stocks – got burned the most.

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers selling unsuitable Exchange Traded Products (ETPs).  When a broker sells you a product that is “guaranteed” to make money during volatile markets, there’s no downside for the person selling the vehicle. They always make money on investors’ fear and ignorance.

A prime recent example is the widespread sale of volatility-linked Exchange-Traded Products. While these vehicles may make money in the short term when the stock market turns bearish, they can lose money in the long run, which brokers may not disclose. Volatility ETPs are linked to “fear” indexes like the CBOE Volatility Index, or VIX, a short-term gauge of downside activity. When the market dips, they can increase in value.

Average investors, however, get burned when they hold onto fear indexes. Brokers who sold these products know that, but often don’t get clients out before they lose money. The U.S. Securities and Exchange Commission (SEC) recently cracked down on broker-dealers who sold these vehicles to unsuspecting investors.

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses due to recommendations by financial advisors and brokers to invest in Exchange-Traded Products (ETPs). With market gyrations giving average investors motion sickness this year, it’s understandable for many to find ways of hedging volatility. When the market is up one day and down another, it’s pretty unnerving.

That’s why Wall Street invented Exchange Traded Products linked to volatility indexes, which track the nervy fears of the market at large. When anxiety is high, these indexes are high. One of the most popular such indexes is the so-called VIX, which is managed by the Chicago Board Options Exchange. Brokers and advisors often recommend ETPs based on the VIX for clients who want to hedge against market volatility.

ETPs are securities traded on stock exchanges that can track anything from baskets of bonds to precious metals. For many investors, they can be efficient ways of owning commodities or hedging prices on nearly any kind of security. But each have their own risk profile. Some are clearly unsuitable for unprepared investors.

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