UBS to Redeem Two Leveraged Exchange-Traded Notes
Redemptions for 2x Monthly Leveraged Long Exchange-Traded Access Securities and S&P MLP Index ETN
By
Leslie Josephs
Updated Jan. 20, 2016 6:38 p.m. ET
For some investors, a risky bet on energy backfired Wednesday.
UBS Group AG said it would redeem shares of two of its niche investment products that are tied to energy companies, as a fall in energy-linked shares was steep enough to require UBS to announce a mandatory redemption. The move highlights the risk in leveraged exchange-traded notes, which expose investors to bigger gains—or losses—than the indexes they track.
A unit of UBS Group AG will redeem outstanding notes of two exchange-traded products linked to energy companies amid a sharp selloff in the sector. Photo: Bloomberg News
The two UBS products fell more than 20% Wednesday and are down more than 50% so far this year. UBS said in a release that on Feb. 1 it would pay investors an amount yet to be determined for outstanding notes.
“This is a toxic cocktail of a bad exposure in a bad wrapper,” Ben Johnson, director of ETF research at Morningstar Inc., said of leveraged ETNs in general.
The forced UBS redemptions apply to the 2x Monthly Leveraged Long Exchange-Traded Access Securities, which is tied to an index tracking energy infrastructure master limited partnerships, and the 2x Monthly Leveraged S&P MLP Index ETN. UBS has 43 other exchange-traded notes.
Investors had put billions of dollars into master limited partnerships in recent years, attracted to their steady dividends and tax benefits.
Generally energy pipeline and storage companies, MLPs billed themselves as a haven investment in the energy sector, saying the industry needed infrastructure even as oil prices fell. But MLPs have tumbled amid a rout in oil prices and other energy-tied investments in recent months.
The NYSE Alerian Index, a gauge of the MLP sector, is down more than 26% this year, and more than 51% over the past 12 months.
Investors turned to leveraged exchange-traded notes last year in a search for returns, which were scarce as the broader U.S. stock market fell from record highs.
ETNs differ from exchange-traded funds, or ETFs, which are similar to mutual funds but trade on an exchange like a stock. Notes don’t hold underlying assets; instead, the issuer—usually a bank—says it will pay investors based on the performance of an index or security. The leveraged versions multiply their daily performance, giving investors outsize exposure to certain asset classes.
Exchange-traded notes are a small and controversial area of exchange-traded products. As of the end of 2015, there were about $20 billion of assets in these notes, compared with some $2.07 trillion in U.S.-listed exchange traded products overall, according to FactSet data.
Leveraged exchange-traded notes grew popular last year with investors who were seeking to make large bets on everything from a rebound in emerging-market stocks to a rise in technology companies. Investors poured $4.2 billion into leveraged notes in 2015, up more than 80% from the previous year, according to FactSet.
Regulators and analysts have advised investors about the risks of investing in exchange-traded notes as well the use of leveraged bets in exchange-traded products. The two UBS products combined the two.
UBS tells investors on its website under “key considerations” for the products: “You may lose some or all” of the investment or principal.
Last month, the Securities and Exchange Commission issued a bulletin for investors about exchange-traded notes. “Do not invest in something that you do not understand,” it said.
NYSE ARCA, the exchange where the products are listed, briefly halted trading of the products before the announcement.
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