When An ETF Changes Its Exposure

November 08, 2017

‘Lack Of Recourse For Investors’

Kashner also expressed concerns over "the lack of recourse for the investor," citing a September court case decided in BlackRock's favor.

In this class-action lawsuit, ETF investors sued BlackRock for losses incurred during the Aug. 24, 2015 "flash crash," stating that BlackRock had failed to clearly state the risks of trading using certain order types. The judge, however, ruled that investors who'd bought ETFs after they'd first been issued to authorized participants were unable to sue the issuers for misrepresenting risks in the registration statement.

Though the decision is likely to be appealed, it could make it harder for investors to sue issuers over risks not included in the fund prospectus—such as the risk of their fund completely changing its exposures through a new benchmark.

That leaves investors with the only recourse they've ever had to express displeasure over an index change: pulling their money from a fund.

Once LARE switches to a marijuana stocks ETF, "there is zero chance we will stay in this fund," said DeCaprio, whose largest client is a manufacturer of medical marijuana.

Unintended Exposures

Dave Nadig, CEO of ETF.com, weighed in on the controversy: "With any investment, knowing what you own is always the most important guidepost. Anytime you see even a subtle change in a fund's investment objective, I worry existing shareholders can end up with unintended exposures. And this hardly seems like a subtle change."

Interestingly, neither the website for LARE nor the Tierra Funds website mentions the impending index change. While recent SEC filings do reflect the impending change, the websites investors often turn to when researching a fund are silent on the matter.

"Woe be to any investor who stumbles on the Tierra Funds website right now," said Nadig. "They'd have no reason to believe that the fund will invest in anything other than Mexican and Brazilian REITs for the foreseeable future." 

Contact Lara Crigger at [email protected]

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