ARKK Structured Product Losses Mount

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Wall Street brokers such as JP Morgan, Morgan Stanley and Citigroup have sold billions of dollars in complex structured products or “structured notes” to their retail customers in recent years.

Many brokers pitched these structured products as ‘“low risk” bond-like investments with higher yields. Unfortunately, many customers were not told of the significant downside risks of these investments.

Structured products are vastly different from regular bonds. Although they are technically debt obligations with a maturity date, say one to two years, neither the coupon payment nor the full return of principal is guaranteed. Instead, returns are contingent on the performance of an underlying index such Cathie Woods’ ARK Innovation ETF (ARKK), or a stock, such as Apple (AAPL) or Tesla (TSLA).

The notes use derivatives to provide exposure to a given stock allowing investors to make supersized bets on investment managers like Cathie Wood. The downside is that the notes are hard to exit and, due to their use of leverage, investors can be exposed to enormous losses.

Technology stocks are now in a bear market due to interest rate and recession concerns and structured products tied to technology stocks like the ARK Innovation ETF (ARKK) are plummeting.

ARKKs recent leg down mostly stems from its huge Teladoc Health (TDOC) holding. Teladoc has crashed over 40% as patients no longer need to visit their doctors by video.

Other components of ARKK are other technology companies that have also taken a huge hit as we emerge from the pandemic.

According to Bloomberg, there are at least 50 ARK-related structured notes worth at least $100 million and issued by banks including Morgan Stanley, Citigroup, BNP Paribas and more.

Structured products based on the ARK Innovation ETF (ARKK) have broken through the 40% downside barrier resulting in enormous principal losses for investors.

Those losses are now baked in and will be realized at the end of the term of the notes.

Investors also need to be aware that structured products or notes have no secondary market or liquidity and cannot be sold in a down market like bonds.

Investors suffering ARKK structured product losses should contact a securities attorney to see if they have recourse against their brokers for selling unsuitable investments or committing investment fraud.

Disclaimer:This article does not contain investment, tax or legal advice.

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