As most individual investors now understand, oil and gas securities, including common stock, bonds and master limited partnerships (MLPs), can be extremely volatile, high-risk and lead to substantial losses. Over the last few years, certain financial advisors and stockbrokers, and the financial institutions for whom they worked, fell in love with oil and gas securities, particularly for their high-yield dividends in an otherwise low-to-no yield market environment. As a result of this reckless infatuation by some trusted financial advisors, throes of conservative individual investors, many retired and elderly, sustained major financial losses in their nest-egg portfolios when the oil and gas markets nosedived. Given their advanced age and life-stage, this class of elderly, conservative investors simply does not have the ability to replace these losses. The effect has been devastating — ruined retirements, a down-size in quality of life, and a theft of a sense of financial security that took decades of hard work to achieve. Unfortunately, I am seeing this far too often these days.
The truth is that this should never have occurred in the first place. Had financial advisors, and the securities brokerage firms obligated to supervise them, ensured that such conservative investors were never over-exposed to, or over-concentrated in, such unsuitable and inappropriate oil and gas investments, these life-changing losses would not have been realized.
To make matters worse, I have seen financial advisors recommend leveraged oil and gas exchange traded funds (or ETFs) to conservative individual investors. An exchange traded fund, or ETF, is a pool of assets, primarily stocks, bonds or commodities, which trades on a stock exchange for close to its net asset value over the course of the trading day. Most ETFs attempt to track the performance of a particular index. In comparison, leveraged ETFs aim to magnify the performance of the indexes they track for a single day, and may include derivatives, such as index swaps and equity options allowing increased exposure to the targeted index. By way of example, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull and Bear 3x Shares seeks daily investment results, before fees and expenses, of 300% or 300% of the inverse (or opposite) of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
While leveraged ETFs have their place in certain portfolios, they are typically highly unsuitable when held long-term in an individual investor’s account, particularly when that investor does not wish to speculate with his hard-earned investment money. Given their leverage and composition, ETFs can wreak havoc on a portfolio if unsuitably recommended by a broker and improperly supervised by his employing firm.
Notably, the Financial Industry Regulatory Authority (FINRA), the front-line securities regulator of brokerage firms and stockbrokers, has made crystal clear its view on leveraged ETFs: “these products may be useful in some sophisticated trading strategies, [but] … typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.” FINRA Regulatory Notice 09-31. FINRA has also brought enforcement actions against and fined securities firms for their inappropriate sales of leveraged ETFs.
If you are a conservative investor and have suffered significant losses in leveraged oil and gas ETFs recommended by your financial advisor, you may have a case to recover your investment losses.
David Chase is a securities attorney and a former SEC enforcement lawyer who is the principal of the Law Firm of David Chase, located in Fort Lauderdale, Florida. Mr. Chase represents stock market investors nationwide in cases to recover their investment losses due to stockbroker fraud and financial advisor negligence. The law firm’s website is: davidchaselaw.com. Mr. Chase can be reached toll-free at: 800-760-0912.