When Wall Street Serves Up this Kind of Garbage, RUN!

The more she talked, the angrier I got. And the angrier I got, the more I realized I had to do something.

The setting was a recent group session where a handful of investment experts had gathered to talk markets. The topic at hand was the recent epic collapse in volatility-based Exchange Traded Products.

You may have heard of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), or seen what I wrote about it last week. This Exchange Traded Note (a kind of debt instrument, as opposed to a plain-vanilla Exchange Traded Fund) just melted down in spectacular fashion.

It lost more than 90% of its value in a single day — not to mention almost every penny of gains generated since inception in 2010! Here’s a weekly chart showing the carnage ...






When this Wall Street insider, a former employee of a top brokerage firm and ETF specialist, took the microphone, her message was basically “tough luck.” Investors should’ve read the prospectus, should’ve known what they were buying, and if you lose 95 cents of every $1 you invest in the blink of an eye, hey? That’s life.

I couldn’t believe it. I wanted to stand up and ask: “Have you no sense of decency?” like I was at the McCarthy hearings. This ETN was pure Wall Street garbage! The kind of esoteric, anything-but-plain-vanilla crap that exposed average investors to massive, out-of-control losses.

You’d never lose that much money that quickly with shares of IBM (IBM, Rated “C+”), Microsoft (MSFT, Rated “A”), or Procter & Gamble (PG, Rated “C+”), much less the hundreds of traditional ETFs in the marketplace. Things like options and futures are different, but guess what? If you want to trade that stuff, you need to get approval from your broker, which at least requires some level of suitability screening.

It’s not like XIV was a tiny product, either. It had around $1.9 billion in assets. Its cousin the ProShares Short VIX Short-Term Futures ETF (SVXY) has another $1.6 billion. That “investment” is down 91% year-to-date.

Of course, you could’ve bought something called the VelocityShares VIX Short Volatility Hedge ETN linked to the S&P 500 VIX Futs Shrt Volatil Hdg Idx TR (XIVH) — yes, that’s really what it shows up as on my screen. It “only” lost 79% of its value year-to-date. Or the VelocityShares VIX Variable Long/Short ETN linked to the S&P 500 VIX Futures Variable L/S Idx TR (LSVX). That puppy is only down 39%. Those two ETNs have just over $103 million in assets between them.

But you’re still talking about massive, double-digit losses on products that must drive investors like Warren Buffett batty! I’m right there with him.

There’s a bigger issue for the markets overall, too. The further along we got in the last bull cycle, the worse the garbage Wall Street saw fit to peddle and finance. No Income, No Job, No Asset “NINJA” loans ... bottom of the barrel subprime Mortgage Backed Securities ... CDOs of CDOs (a.k.a. CDO-Squareds) — you remember all that fun stuff, don’t you?

Now we have toxic volatility ETPs, double-and-triple-leveraged funds, and even (briefly) talk about 4X products last spring. Step right up, spin the wheel, you too could win a kewpie doll!

You want my advice? When Wall Street pitches this kind of garbage, run away. If the name of a fund you’re looking at barely fits on your widescreen monitor, that’s probably a sign to find something better for your investment dollars!


Until next time,

Mike Larson