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Risky UBS ETRACS Lead to Investor Losses, Triggering Mandatory Redemption

The value of ETRACS Exchange Traded Notes, unsecured debt securities offered by UBS, has plummeted 60%, triggering mandatory redemption and raising questions about potential sales practice violations by UBS brokers. The securities attorneys of Fitapelli Kurta are interested in hearing from investors who invested in ETRACS. Read on to learn more about recent developments. 

UBS ETRACS

What are ETRACS Exchange Traded Notes? UBS ETRACS are unsecured debt securities designed to track the total return of a certain market index. UBS also characterizes the notes as “senior” and “unsubordinated.” Unsubordinated debt, also known as senior debt, must be repaid before any other form of debt. If the debtor goes bankrupt or otherwise becomes insolvent, holders of this type of debt must be the first to be repaid. 

When the value of these notes plummeted, UBS ordered that the notes be redeemed. On March 24, 2020, UBS announced that one of their ETRACS, the Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN due May 22, 2042 will be redeemed, as mandated by the value of the securities plummeting 60%. This comes as the coronavirus pandemic has wreaked havoc on the stock market, but it also raises questions about whether or not UBS brokers should have recommended these notes in the first place. In its Pricing Supplement for the Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN, UBS warned,“[t]he Securities are not secured debt and are significantly riskier than ordinary unsecured debt securities. Unlike ordinary debt securities, the return on the Securities is linked to the performance of the Index. The Securities are two times leveraged with respect to the Index and, as a result, may benefit from two times any positive, but will be exposed to two times any negative, monthly performance of the Index.” 

This mandatory redemption comes after UBS offered investors the option to exchange certain ETRACS for other ETRACS back in December 2019. The new funds were touted as being “economically identical.” The exchanges were designed to relieve UBS AG Switzerland of its obligations in regards to the funds, which are sponsored solely by UBS AG. If the Series A funds are not exchanged, UBS AG has the right to call then. Eight funds were involved, as we can see from the table below:

Series A Series B
ETRACS Alerian MLP Index ETN  AMUB ETRACS Alerian MLP Index ETN Series B
BDCL 2xLeveraged Long ETRACS linked to the Wells Fargo Business Development Company Index  LBDC 2x Leveraged Long ETRACS Wells Fargo Business Development Company Index ETN Series B 
BDCS ETRACS Linked to the Wells Fargo Business Development Company Index  BDCZ ETRACS Wells Fargo Business Development Company Index ETN Series B 
CEFL ETRACS Monthly Pay 2xLeveraged ClosedEnd Fund ETN  CEFZ ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN Series B 
DJCI ETRACS Linked to the Bloomberg Commodity Index Total Return  DJCB ETRACS Bloomberg Commodity Index Total Return ETN Series B
MLPI ETRACS Linked to Alerian MLP Infrastructure Index

 

MLPB ETRACS Alerian MLP Infrastructure Index ETN Series B 
MORL ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN MRRL ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN Series B 
UCI ETRACS Linked to the UBS Bloomberg Constant Maturity Commodity Index (CMCI) Total Return UCIB ETRACS UBS Bloomberg Constant Maturity Commodity Index (CMCI) Total Return ETN Series B

But now the situation has escalated and now the UBS ETRACs are being redeemed, having declined in value by 60%. The ETRACs in question include the following:

  • ETRACS Monthly Pay 2xLeveraged U.S. High Dividend Low Volatility ETN (HDLV)
  • ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN (SMHD)
  • ETRACS Monthly Pay 2xLeveraged Diversified High Income ETN (DVHL)
  • ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFL)
  • ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (CEFZ)
  • ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL)
  • ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (LBDC)
  • ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MORL)
  • ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (MRRL)
  • ETRACS Monthly Pay 2xLeveraged MSCI US REIT INDEX ETN (LRET)
  • ETRACS 2x Monthly Leveraged Alerian MLP Infrastructure Index ETN (MLPQ)
  • ETRACS Monthly Reset 2xLeveraged ISE Exclusively Homebuilders ETN (HOML)
  • ETRACS 2xMonthly Leveraged S&P MLP Index ETN Series B (MLPZ)
  • ETRACS Monthly Pay 2xLeveraged Wells Fargo MLP Ex-Energy ETN (LMLP)
  • ETRACS ProShares Daily 3x Inverse Crude ETN linked to the Bloomberg WTI Crude Oil Subindex (WTID)

According to its prospectus supplement, BDCL is not intended for retail investors in the European Economic Area. The prospectuses for several other ETRACs contained the same warning. This raises the question as to why American investors, including retirees who sought to safeguard their principal, were placed in ETRACs by UBS brokers.

If your broker recommended that you invest in UBS ETRACs, don’t hesitate to contact a securities attorney to learn about your options for recovery. Call (877) 238-4175 or email info@fkesq.com for your free case consultation with the securities attorneys of Fitapelli Kurta.

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