Warning: Don't chase returns with exotic products

Look beyond the yield
“Investors should never make an investing decision solely by looking at an investment’s return, whether past or projected. Higher returns come with higher risk. Investors should always look behind an investment’s yield, ensure that they understand how the investment works and carefully consider its fees and risks before investing,” said Gerri Walsh, FINRA’s vice president for investor education.

FINRA is concerned about the number of investors that are turning to higher-risk products such as:

• High-yield bonds, characterized by lower credit ratings, higher risk of default and consequently a more attractive interest rate to compensate the investor for the additional risk.
• Floating-rate loan funds, which invest in loans extended by financial institutions to entities of below investment-grade credit quality. Such companies usually have a high debt-to-equity ratio, and the loan yields tend to be higher than investment-grade bonds.
• Structured retail products, which involve unsecured debt with payoffs linked to a variety of underlying assets. They have significant drawbacks such as credit risk, market risk, lack of liquidity and high hidden costs.
• Leveraged products, including ETFs and mutual funds that seek to deliver multiples of a specified benchmark by increasing exposure to the benchmark through the use of derivatives.