Part 7: Now, many worry that loan losses will mount as small and midsize businesses struggle during the downturn. A drop in the value of BDC holdings can increase its leverage level, possibly exceeding thresholds set with investors.
“If you see the carnage you’re seeing in the larger businesses, that is going to be a real problem for BDCs,” said Dave Lafferty, chief markets strategist at Natixis Investment Managers.
Some investors place little blame on Wall Street for their losses, saying they traded products they knew were akin to gambling at a casino—risky, difficult to time and even harder to profit from long-term.
The VelocityShares 3x Long Crude Oil ETN was issued by Citigroup. Its prospectus says ETNs “may not be suitable for investors who plan to hold them for a period other than one day,” and noted it is “possible that you will suffer significant losses in the ETNs even if the long-term performance of the applicable Index is positive.”
Investors who sold the VelocityShares crude oil ETN at the end of last year could have come out positive, because nearly all markets, including commodities, rose on prospects at the time for global growth. The pandemic sent crude prices down sharply to $14 a barrel, from $61 a barrel at the end of 2019. The losses were amplified for holders of the VelocityShares ETN. It last traded at around 16 cents a share, down from about $15 at the start of the year. In April, Citigroup pulled the ETN off of the market altogether, adding in a statement that it would no longer issue notes of that variety.
“I don’t think it’s a good investment tool for most people. It’s like a craps game,” said Randall Simpson, a 50-year-old project manager and environmental planner from Phoenix who has traded that ETN on and off for five years. Mr. Simpson said he has lost nearly 90% of his initial investment.
Years of investing, though, had taught him never to put a substantial portion of his portfolio into ETNs, so his losses have been manageable, if painful, he said.
Some investment professionals, including Messrs. Swedroe and Rosenbluth, contend that leveraged ETNs shouldn’t be as accessible as they are to individual investors.
Some firms, including Vanguard Group, have stopped handling client purchases of leveraged or inverse notes altogether. Other online platforms catering to amateur investors continue to allow them to dabble in complex products."
Write to Akane Otani at akane.otani@wsj.com and Sebastian Pellejero at sebastian.pellejero@wsj.com
[end of part 7]
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Because the Good Life is Just a Pump or Two Away
