Introduction

Welcome to Alternative Investments, a unit covering specialized products that go beyond traditional stocks, bonds, and pooled investments.

Exam Weight: Part of 17 questions

What You Will Learn

In this unit, you will cover:

• Exchange-Traded Notes (ETNs): Unsecured debt instruments that track an index, and why they carry credit risk that ETFs do not
• Leveraged Funds: Products that amplify daily returns using derivatives and borrowing, and the compounding trap that makes them unsuitable for long-term holding
• Inverse Funds: Products designed to profit from declining markets, with the same daily reset problems as leveraged funds
• Structured Products: Pre-packaged strategies combining bonds with derivatives, offering tailored payoffs but limited liquidity and issuer credit risk

Why This Matters

These products appear on the Series 66 exam because they are widely available to retail investors yet carry risks that are easy to misunderstand. The exam tests whether you can distinguish an ETN from an ETF, explain why a leveraged fund loses value in a choppy market, and identify the credit risk embedded in structured notes. Advisers must understand these products to make suitable recommendations and to steer clients away from inappropriate holdings.

Let us start with exchange-traded notes and the critical distinction between owning assets and owning a promise.