Part 6: "So-called mortgage real-estate investment trusts, or mortgage REITs, return a significant portion of their profits to investors through dividends. When interest rates are low, mortgage REITs can look attractive to investors because they offer relatively high income.
"By buying a leveraged ETN, Mr. Zhu was amplifying his bet on the mortgage market. Last year, shares of mortgage investment firms rallied. But this March, Mr. Zhu’s bet blew up.
The coronavirus pandemic sent corporations scrambling for cash, increasing volatility in overnight borrowing markets on which mortgage REITs rely. That put pressure on their shares. ETNs making leveraged bets on mortgage investment firms nosedived.
The ETN Mr. Zhu bought from UBS slumped to less than 25 cents a share, from around $14 at the start of the year. On March 17, UBS redeemed it, notifying investors they would be paid out $0.201 per security held. That resulted in a loss of $700,000 for Mr. Zhu, who had purchased the ETN at $13.35.
"“We’re too old to play those games,” Mr. Zhu said. “It’s too difficult for us. We were just looking for basic income.”
He is now suing his online brokerage, TD Ameritrade Inc., alleging the company made the ETN available to individual investors without providing sufficient disclosures. A representative for TD Ameritrade declined to comment.
Cleveland-based Brad Davis stumbled upon UBS’s leveraged mortgage REIT ETN while browsing commission-free trading app Robinhood. Like Mr. Zhu, he wound up being hit with heavy losses after UBS redeemed the note.
"Ultimately, the 33-year-old doesn’t fault Robinhood for allowing him to trade the products. “I knew they were risky,” he said." [end of part 6]
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