Alternative investments and complex products

ETNs are senior, unsecured, unsubordinated debt securities issued by a bank or financial institution that have a maturity date and seek to mimic the return of certain equity, commodity, and currency indexes. ETNs offer returns linked to the performance of a particular market index, but they represent no ownership interest in a pool of securities, pay no periodic coupon interest, and offer no principal protection. When you buy an ETN, you're buying a debt instrument backed only by the creditworthiness of the issuer. Therefore, the performance of an ETN may be affected by both the performance of the particular index as well as the credit rating of the issuer.

For additional information, please see this Investor Alert issued by the SEC and FINRA related to ETNs.

Leveraged and inverse ETFs and ETNs are unique and involve additional risks and considerations not present in traditional products. Leveraged products are often identified with a multiplier in their names, such as "2x" or "3x," or may have a fund-specific description such as "ultra." These funds are designed to double or triple the performance of a particular index over a stated period of time. Similarly, "inverse" or "short" products are designed to deliver the opposite return of an index, or, in the case of a leveraged inverse fund, a multiple of the opposite return of the index. Because the products reset over short periods, they're designed to deliver their stated returns only for the length of their reset periods. Most leveraged and inverse ETFs and ETNs currently reset on a daily or monthly basis and are therefore designed to deliver their stated returns for the reset period only (i.e., one day or one month).

What does this mean? On any given day, if you use a leveraged or inverse product, you can expect a return similar to the stated objective. However, because of the structure of these products, their rebalancing methodologies, and the compounding math, extended holdings beyond one day or one month, depending on the investment objective, can lead to results different from a simple doubling, tripling, or inverse of the benchmark's average return over the same period. This difference in results can be magnified in volatile markets. As a result, these types of investments aren't generally designed for a buy-and-hold strategy, even if the "hold" period covers only several days. Such funds aren't intended for investors who don't intend to actively monitor and manage their portfolios. These funds are riskier than alternatives that don't use leverage.

For additional information, please see this Investor Alert issued by the SEC and FINRA related to leveraged and inverse ETFs.

Interval funds are a type of closed-end fund that continuously or periodically offer shares to investors. Unlike traditional mutual funds, interval fund shares generally do not trade on a national securities exchange. Instead, interval funds periodically repurchase shares directly from shareholders at net asset value (NAV), generally through repurchase offers. Because interval funds are not required to meet daily redemption requests, they may invest in less liquid assets such as private equity, private credit, real estate, certain debt instruments, derivatives, and other alternative investments. Because of this, interval funds have unique characteristics and risks that investors should understand before investing.

For example, private investments within interval funds may involve a high degree of risk, and some distributions from interval funds may include return of capital which can affect taxes and how fund performance is interpreted. In addition, investors generally cannot redeem shares whenever they want and may only participate in scheduled repurchase offers, which are typically made every three, six, or twelve months, as described in the fund's prospectus and annual shareholder reports. During a repurchase offer, a fund will repurchase only a limited percentage of its outstanding shares. If redemption requests exceed the amount available for repurchase, requests are generally fulfilled on a pro rata basis, meaning investors will not be able to redeem all shares submitted for repurchase. This will substantially limit an investor's ability to access their money.

The price investors receive for shares accepted in a repurchase offer is determined at a future date based on the fund's NAV. As a result, investors generally will not know the exact price they will receive when they submit a redemption request. Because interval funds often invest in less liquid assets, those investments may be more difficult to value or sell and may need to be sold at a discount, which can increase investment risk. As with any investment, investors can lose money, including a substantial portion of their investment. There is no guarantee that interval funds will achieve higher returns or perform differently than other investment options.

Interval funds may also have fees and expenses that differ from, and in some cases exceed, those associated with traditional mutual funds, including repurchase fees. Before investing in an interval fund, investors should carefully review the prospectus and offering documents, which contain important information regarding the fund's objectives, risks, fees, expenses, and repurchase policies.

For additional information, please see the SEC's Investor Bulletin on Interval Funds and related investor education materials provided by FINRA.

Commodity and volatility futures-linked exchange-traded products (ETPs) are investments that are traded on an exchange, similar to individual stocks. The price and value of the product may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity.

Commodity and volatility futures-linked ETPs may be subject to greater volatility than securities ETPs and may not be appropriate for all investors. Unique risk factors of a commodity product may include, but are not limited to, the product's use of aggressive investment techniques, which can include the use of options, futures, forwards, or other derivatives; correlation or inverse correlation; market price variance risk; and leverage.

The performance of commodity-linked products may deviate significantly from the performance of the actual referenced commodity. This is because many of these products don't physically hold commodities, but instead hold or track indexes based on futures or other derivative products.

A futures contract is an agreement to buy or sell at a certain date for a predetermined price, so its value generally moves along with spot prices of the commodity or index. However, this correlation is imperfect. To avoid taking physical possession of the underlying commodities, commodity products conduct a regular "roll" process, selling contracts nearing expiration and using the proceeds to purchase longer-dated futures contracts. This process of buying longer-dated futures contracts can sometimes be more expensive than simply buying and holding the underlying commodity because of changes in the spot price of the commodity and the amount of time value in the futures contract—a situation known as "contango." Therefore, if the market for a particular commodity is subject to contango, the performance of a commodity-linked product will deviate from the spot-price change of the commodity over the same period.

Before investing in a commodity or volatility futures-linked ETP—or any ETP—you should carefully read the prospectus and consider the product's objectives, risks, charges, and expenses.

For additional information, please see this Investor Alert issued by the SEC and FINRA related to volatility-linked products.

Also known as "alternative indexing" or "smart beta," alternative-weighted investments are typically ETFs that—like traditional index funds—try to replicate a specific index. Traditional index funds achieve this by weighting securities based on size and market capitalization. Alternative-weighted investments instead use a rules-based approach that looks at different characteristics, such as price momentum, dividend payments, earnings, and volatility—factors typically used in active management strategies. You should therefore evaluate alternative-weighted ETFs the same way you would an actively managed investment.

For additional information, please see this Investor Alert issued by the SEC and FINRA related to smart beta.