Corona Virus Claims UBS ETRACS ETN Structured Products as Risky Debt Notes Free-Fall

Following the 2008 market crash, UBS Group created a new class of alternative investments known as ETRACS Exchange-Traded Notes (ETNs), which the firm described as senior unsecured and unsubordinated debt securities tied to a certain index.

Given these products' high-risk nature, a broker or financial adviser who recommended ETRACS ETNs to a conservative-to-moderate investor may be liable for losses caused by this unsuitable recommendation. So...what were the risks?

We've previously documented the great risk of investing in debt securities—a majority of 2018's 20 Worst Bond Fund Returns belonged to debt securities—and these ETRACS are no exception. Further compounding risk, some of the ETRACS ETNs were risky real estate investment trusts (REITs) while others were linked to the energy sector and oil/gas interests, which the COVID-19 chaos hit especially hard.

Yet another addition to the UBS Group's risky-securities stew was the addition of leverage: many of the products were formed as 2x Leveraged ETNs, meaning that while all gains would double, so too would all losses.

And before you take that bet, it's not so simple as "lose today, win tomorrow." According to ETRACS ETN securities documents, the products were subject to mandatory redemption in times of economic hardship and as coronavirus' financial harm began plaguing the stock market in March 2020, UBS Investment Bank called many ETRACS ETNs for such a mandatory redemption.

For investors looking to ride out the COVID-19 storm, sustaining a call when the product has lost significant value is disastrous: Instead of trying to ride out the storm and hope for an eventual recovery, mandatory redemption requires the issuer to redeem the product—in this case certain ETRACS ETNs—now, when the securities' value is at rock bottom...meaning that investors holding ETRACS not only lose a lot of money (over 60% in many cases), but lose the ETRAC itself.

Thus, the investment risk posed by UBS' ETRACS ETNs literally becomes, "lose today....the end."

Over the past month, UBS declared "the end" by calling mandatory redemptions of the following ETRACS ETNs, which come in complex forms i.e. 2x Leveraged or 3x Inverse:

ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL)

ETRACS 2x Leveraged Long Wells Fargo Business Development Company Index ETN (BDCY)

ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFL)
ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFZ)

ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN (DVHL)

ETRACS 2x Leveraged Dow Jones Select Dividend Index (DVYL)

ETRACS 2x Leveraged US High Dividend Low Volatility ETN (HDLB)

ETRACS Monthly Pay 2xLeveraged U.S. High Dividend Low Volatility ETN (HDLV)

ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (HOML)

ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (LBDC)

ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP)

ETRACS Monthly Pay 2xLeveraged MSCI US REIT INDEX ETN (LRET)

ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (MLPQ)

ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B (MLPZ)

ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL)
ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MRRL)

ETRACS Monthly Pay 2x Leveraged S&P Dividend ETN (SDYL)

ETRACS Monthly Pay 2x Leveraged US Small Cap High Dividend ETN (SMHB)

ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHD)

ETRACS ProShares Daily 3x Inverse Crude ETN linked to the Bloomberg WTI Crude Oil Subindex (WTID)

Other ETRACS, such as the Alerian MLP Index ETN (AMU [Series A] and AMUB [Series B]), Wells Fargo Business Development Company Index ETN (BDCS and BDCZ), Bloomberg Commodity Index Total Return ETN (DJCI and DJCB), and UBS Bloomberg Constant Maturity Commodity Index (UCI and UCIB) have not yet been called for a mandatory redemption, but the risk for disproportionately large investment losses remains for all structured products including ETRACS ETNs.

In 2017, Forbes wrote an article about ETRACS titled, These 18% Dividends Are As Risky As They Look, and found that "their 18% average yield masks something shocking: they're not only dangerous but they're not even income investments!" The article identifies several specific specific ETNs, which UBS brands under the name "ETRACS," such as CEFL and MORL, which now appear on the above list of UBS mandatory redemptions.

Given just how risky UBS ETRACS ETNs looked—even back in 2017—a brokerage firm selling such a product to an unsophisticated or risk-averse investor may be liable for damages caused by the brokerage's failure to adhere to FINRA suitability rules. For such a harmed investor, it may not be "the end" after all.