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Many Volatility Index (VIX) ETNs Down Over 25% in 2014

US stocks saw periods of extreme volatility during 2014, but the average risk level, as measured by the VIX, was much lower than in previous years. Several investment funds that track volatility, both leveraged and unleveraged, actively trade in the US in the form of exchange traded notes (ETNs).

ETNs are set up to track the daily performance of an underlying index or strategy, allowing investors to buy a single security instead of many individual securities. Leveraged ETNs are set up to track the daily performance of an underlying index or strategy, usually by two or three times in the same (bull) direction or inverse (bear) direction, by purchasing or selling complex option and derivative contracts in addition to the underlying securities.

The following securities that track volatility were down over 25% each in 2014:

Ticker Fund Name 2014 Performance
CVOL C-Tracks Citi Volatility ETN -68.04%
TVIX VelocityShares Daily 2X VIX Short Term ETN -63.20%
UVXY ProShares Ultra VIX Short-Term Futures -62.53%
TVIZ VelocityShares Daily 2X VIX Mid Term ETN -36.40%
VIXY ProShares VIX Short-Term -26.43%
VXX iPath S&P 500 VIX Short-Term Futures ETN -25.95%
VIIX VelocityShares VIX Short Term ETN -25.91%

Leveraged funds are specifically structured for traders looking to time the market and realize short-term profits based on the underlying index making single-day moves. Leveraged funds are generally not suitable for long-term investors, as the investment will ultimately lose value or significantly underperform, over a longer term, compared to its stated objective. In fact, Direxion Funds, a leader in leveraged ETFs, puts this disclosure in bold print on its web-page for each of its leveraged funds: “The fund should not be expected to provide [the multiple] times the return of the benchmark’s cumulative return for greater than a day.” Therefore, these leveraged funds are highly unsuitable for long term investors.

If your financial advisor or stockbroker recommended that you invest in securities that track volatility, you may have options to recover your investment loss. If your advisor failed to fully disclose the risks of investing in securities that track volatility, then you may have a claim for misrepresentation. If your investment objective was to only invest in safe and stable investments, you may have a claim for unsuitability. If securities that track volatilitymade up a large portion of your portfolio, then you may have a claim for over-concentration and lack of diversification. If your advisor purchased this fund without your knowledge, you may have a claim for unauthorized trading. If your advisor purchased this fund on margin, you may have a claim for excessive use of margin and negligence.

The attorneys at Carlson & Associates, P.A., located in Miami, Florida, represent investors who have lost money due to the improper conduct of financial advisors. If you would like to have a free consultation, we can be reached at (305) 372-9700 to discuss your options.

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