Author Topic: 28'000$ tuition fee to learn the difference between ETFs and ETNs  (Read 2973 times)

CHF

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I have to confess that I paid this amount last week for being greedy and not understanding the difference between ETFs and ETNs.
My 831 shares MLPL (UBS AG 2X Monthly Leveraged Long Exchnage Traded Access Securities {E-TRACS} linked to the Alerian MLP Infrastructure Index) for which I paid 28'000 over the last year got redeemed. RIP

Pierre

MgoSam

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #1 on: February 10, 2016, 11:34:00 AM »
Too many dang acronyms. I like to think of them all as WMD's.

I'm a red panda

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #2 on: February 10, 2016, 11:41:09 AM »
I don't invest in ETFs or ETNs. Can you explain what happened?

jinga nation

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #3 on: February 10, 2016, 02:21:36 PM »
I don't invest in ETFs or ETNs. Can you explain what happened?
En ingles, por favor.

obstinate

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #4 on: February 10, 2016, 10:48:45 PM »
OK, so I'm not the OP, but I'll try to explain my best understanding.

The security OP was invested represented a share of debt owed to a bank (or something. I don't really know). It was leveraged, meaning the OP paid X and was owed the appreciation on 2X, along with presumably paying some sort of ongoing fee. The performance of the security was related to a market index (in this case, an energy partnership index of some sort -- maybe something even more esoteric).

The security has a provision to protect the bank in case the price falls quickly. Imagine if OP bought in at X, and then on the same day, the price went to zero. The OP would lose X, and the bank would lose X, because the OP's leverage is unsecured and the risk is to the issuer. So the bank has a rule that if the price drops by more than Y% during some period, they will immediately resolve the note. If the security is down, OP loses twice -- once from the decline in the value of his principle, and once from the decline in the margin, which the OP also owes. Rather, say that the loss in the margin is effectively paid out of OP's principle.

Anyway, that happened. OP I guess has their own ideas about investing, but for everyone else: if the sales brochure of an investment product includes the phrase "an innovative class of investment products," it's probably not something you, as a potential early retiree, are interested in.
« Last Edit: February 10, 2016, 10:50:58 PM by obstinate »

obstinate

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #5 on: February 10, 2016, 10:59:38 PM »
I was slightly wrong. The acceleration happens if the absolute value falls below a certain amount. This is presumably to protect the skin the bank has in the game. Also apparently the fees for this security were almost 1%. OP . . .

obstinate

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #6 on: February 10, 2016, 11:01:40 PM »
And if you're wondering what an energy infrastructure MLP is and why their prices are falling so fast . . . http://www.cnbc.com/2015/01/14/energy-mlps-in-the-red-investors-running-scared.html

CHF

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #7 on: February 10, 2016, 11:38:05 PM »
obstinate, thank you for your explanation.

The main reason, I posted the loss, aside from a little self-pitying (therefore I posted under this topic), is to give my fellow Mustachians the option to learn from my mistakes and not have to do it theirselves. ETFs are a common investment vehicle. ETNs are a similar product but have a completely different design under the hood. I thought, that I understood the risks, but was wrong.

My point is to stay with the usually recommended, asset back uped ETFs, like e.g. VTI or read every damned sentence in the prospectus of your potential investment. Understand it. And if you don't understand it 100% completely to the last word, keep your fingers away.

Basic wisdom, I paid 28'000 for ;-)
« Last Edit: February 10, 2016, 11:46:46 PM by CHF »

slugline

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #8 on: February 11, 2016, 09:19:16 AM »
This also looks like a lesson on the benefit of diversification -- or the risk of concentration. I hope this sum of money didn't represent a large proportion of your invested assets.

CHF

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #9 on: February 12, 2016, 12:29:23 AM »
slugline, thank you for your concern. This was just a part of my "play money". My "real savings" are conservatively allocated. And althought the amount is about my yearly spending, it's only about 2% of my NW. So I'm still FI :-)

Fuzzy Buttons

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Re: 28'000$ tuition fee to learn the difference between ETFs and ETNs
« Reply #10 on: February 12, 2016, 08:48:34 AM »
I have to confess that I paid this amount last week for being greedy and not understanding the difference between ETFs and ETNs.
My 831 shares MLPL (UBS AG 2X Monthly Leveraged Long Exchnage Traded Access Securities {E-TRACS} linked to the Alerian MLP Infrastructure Index) for which I paid 28'000 over the last year got redeemed. RIP

Pierre

I'm sorry to hear about your loss, and relieved I missed out on the same.  Last year I briefly dabbled in the ETN DWTI - a 3x inverse play on the price of West Texas Intermmediate crude futures.  I did research before I bought in, understood the dangers of contango and the difference between an ETF and an ETN in the sense that this was simply a bond that Credit Suisse promised to pay back at a rate matching the movement of the underlying index.  But I did not know anything about the redeeming option.  I closed out my position some time ago with a loss of $500 or so, and took it as a cheap price for learning not to mess around with things I don't understand.  Turns out I was in more danger than I thought.

Though I'm curious why something like UWTI (the matching 3x positive ETN) has not been redeemed.  It's down 99.5% from the peak in mid-2014.  I'm guessing it is structured differently, and the leverage risk is already baked into the price.  Of note is that it did not pay out any dividends or interest like MLPL did - this was just about the price of the note itself.