Highly-leveraged securities issued by UBS crashed in the pandemic-induced market rout. The instruments were held as retirement savings by some investors. Sound familiar?
In March, when UBS' dealing room was buzzing amid massive volatility as the coronavirus outbreak spread, a real estate security issued by the Swiss bank and others tumbled in value. The exchange-traded note had been hugely popular in the past five years, as investor portal «The Street» reported.
The product had returned more than 20 percent at times, making it one of the best-performing pieces of paper available to U.S. investors. Notes issued by UBS paid out monthly as opposed to yearly, which heightened their popularity with clients.
From $14 to 20 Cents
The pandemic's effect on stock markets in March and April led to a rude awakening, especially for less-wealthy clients, according to «The Wall Street Journal» (behind paywall). The U.S. outlet recounts retirees losing everything in two short weeks.
The Zurich-based bank, not the only institute to issue such ETNs, withdrew the instruments after they fell to less than $0.25, from $14 previously. Investors holding the securities were paid $0.20 per note. The wipe-out is reminiscent of Credit Suisse, which in April warned investors of a total loss on oil-based notes. Other banks including Société Générale and BNP Paribas suffered three-digit million losses in their derivatives activities.
Big Returns vs Risks
The story is reminiscent of the financial crisis of 2008/09, when retail and affluent clients bought structured products and derivatives in the hopes of beating market returns. It later emerged that many banks including both UBS and Credit Suisse hadn't adequately informed their clientele of the risks involved in the instruments.
This time it's different – at least in that the ETNs are easily available online via services like Robin Hood or TD Ameritrade. Notes with monthly payouts have proven especially popular with retiree investors; by contrast, professional investors have given the securities a wide berth.
Retail vs Super-Wealthy
UBS has withdrawn 15 such ETNs this year alone, according to «The Wall Street Journal» – after a massive collapse in value. The move runs counter to the image UBS is cultivating in the U.S. as a white-glove adviser to the wealthiest, as finews.com reported on Tuesday.
UBS said «As with any complex financial product, investing in leveraged ETNs carries risk. We provide considerable public disclosure outlining the risks and special features of our exchange-listed ETNs to enable investors to make informed investment decisions.»
In the case of the real estate ETN, UBS' investment bank compiled more than 32 pages (plus appendix) to describe the product and highlight its potential risks. Investor protection advocates argue that complex instructions such as these are nearly incomprehensible to main street investors (a perusal of UBS' prospectus supports this view).
