Can ETFs collapse?

vertex

Im interested in ETFs because Im fed up with paying high charges for below average performance from my fund. Ive heard that most funds underperform and ETFs are safer and - considering fund's fees - perform better than funds.
My question is can they collapse? For example, in theory, I could lose all my money with a fund. Could that happen with an ETF (obviously it would if the index it tracked collapsed). Is an ETF guaranteed to track the index its following?

datostar

You might want to avoid derivative-based, leveraged and 'short' ETFs. Some of these have been known to collapse. An asset-based ETF tracker shouldn't collapse completely unless, as you say, its index collapsed. I think they can be assumed to track the particular index but research the composition of the fund to establish the exact correlation.

Loughton_Monkey

vertex wrote: »

Im interested in ETFs because Im fed up with paying high charges for below average performance from my fund. Ive heard that most funds underperform and ETFs are safer and - considering fund's fees - perform better than funds.
My question is can they collapse? For example, in theory, I could lose all my money with a fund. Could that happen with an ETF (obviously it would if the index it tracked collapsed). Is an ETF guaranteed to track the index its following?

Like any derivative, you are adding a further element of risk. The provider of the ETF could go belly-up and your so-called asset is simply some sort of contractual promise by an Investment Banker.

However, you are trading this risk against a far lower cost of dealing and convenience. Imagine, for example, wanting to invest in the FTSE100. Buying the correct number/weighting of shares in 100 companies would come at such an enormous expense that they would have to go up a huge amount for you to reap a profit when you pay the commission etc. of selling them.

So deal with a reputable company, and you're probably OK. If I want to bet on the 2:30 tomorrow, I'll go to Ladbrokes and place a bet. Of course Ladbrokes might go bust and not pay me, but I am not going to lose sleep over it.

turbobob

vertex wrote: »

Im interested in ETFs because Im fed up with paying high charges for below average performance from my fund. Ive heard that most funds underperform and ETFs are safer and - considering fund's fees - perform better than funds.

Firstly, ETF's are basically OEIC funds with one important difference - they are traded on the stock exchange, just like a share. This has advantages and disadvantages. The main advantage is that you can buy and sell them instantly and the price updates throughout the day. On the downside there are costs involved in buying and selling them, so it may work out more expensive than normal funds for small holdings.

ETF's are not safer than other types of fund, it depends on what they are invested in. Likewise it's completely wrong to say ETF's always perform better than other types of fund. Tracker funds are available which might perform nearly identically to an equivalent ETF.

There is a wide choice of specialist ETF's aimed at sophisticated investors, like sector indexes, leveraged and short ETF's which you won't find with traditional funds.

My question is can they collapse? For example, in theory, I could lose all my money with a fund. Could that happen with an ETF (obviously it would if the index it tracked collapsed). Is an ETF guaranteed to track the index its following?

Most ETF's are backed by the underlying shares of the index they are tracking. So if you bought one of these ETF's tracking the FTSE100 index then it would be the same as owning shares in each of the FTSE100 companies. If every company in the index collapsed and it went to zero then yes you would lose all your money. Chances of that happening are pretty slim, unless a comet crashed into the Earth or something.

Some new types called swap-based ETF's are backed by derivatives, and this potentially has a counter party risk. Examples of this type are the DB-Xtracker ETF's where the counter party is Deutsche Bank. If the counter party failed, you could potentially lose some of the value of the fund. Read more about how these work here - http://www.etf.db.com/UK/EN/binaer_view.asp?BinaerNr=950

ETF's are not guaranteed to track the underlying index exactly, in fact there will always be some degree of tracking error.

vertex

Thanks for your comments guys. Lots to go through there - food for thought.

sabretoothtigger

ETF can be disguised ETN which is a credit note for a virtual fund not an actual fund containing your investment. Barings funds still exist, some Lehmans etf still operate with that name so I presume they survive most of the time.


What happened to lehman etn, I think even they were ok? Google says no, 2 pennies on the dollar returned - http://www.wiserinvestor.com/etfs-vs-etns-you-better-be-careful/

An ETF is required to hold physical assets on its books, which are kept separate from the product issuer. For instance, the S&P 500 SPDR (AMEX: SPY) owns shares in each of the 500 stocks in the S&P 500 Index. If you own a share of SPY, you own a pro rata stake in each of those 500 stocks. Even if the product issuer (SSgA) went bankrupt, you would still own those shares.

That is not the case with an ETN.

That said, all the other ETN issuers appear to be in good shape on the credit front. The list of banks backing ETNs besides Lehman includes Barclays Capital (BCS), Deutsche Bank (DB), Goldman Sachs (GSC), HSBC (HBC), Merrill Lynch (MER) (now Bank of America (BAC)), Swedish Export Credit Corp. and UBS (UBS). All those banks appear to be solid right now, assuming the Merrill Lynch merger goes through.

http://seekingalpha.com/article/95550-does-lehman-failing-endanger-the-overall-etn-market



http://seekingalpha.com/article/30369-a-guide-to-commodity-etfs-and-etns

TRUSt_NO_1_2

Let's keep it simple.
What do you actually own with an ETF ?

Do you own the title or deed to any tangible asset ?
I think not.
Please post a coherent response if I am wrong.

At least with many shares you own a percentage of a tangible asset.
With most ETF's you own a promise...


as in.. " I promise to pay the bearer £1"

But that promise (like £1) is nothing...it is a byte in a computer.It has no intrinsic value. It has no mass .

Your buying nothing..except good will. Somtimes good will does have value.
But do you personally know the person who is making that promise ?

In the next 5 years many people will be robbed of their investments ,when some ETF's go to zero and the 'promisers' walk away rich and the losers will have no recourse.

ETF's were developed by the banks to divert the public from investing in the real thing.......

turbobob

TRUSt_NO_1 wrote: »

Let's keep it simple.
What do you actually own with an ETF ?

Do you own the title or deed to any tangible asset ?
I think not.
Please post a coherent response if I am wrong.

With simple replicating ETF's, take iShares ISF as an example, they can be redeemed for the underlying shares. You have to be dealing in a minimum of 200,000 ETF's at a time (over a million pounds worth), and would typically only be done by Market Makers who need to create or cancel ETF shares. Read the prospectus and it will tell you how to do this. So yes they are genuinely backed by a tangible asset.

JamesU

Further to comments above, this book provides a very good overview on etfs (but Amazon price has increased recently, if not urgent maybe wait until it is discounted to around £12.50 again):

http://www.amazon.co.uk/Financial-Times-Guide-Exchange-Traded/dp/0273727834/ref=sr_1_1?ie=UTF8&s=books&qid=1285417182&sr=8-1


JamesU

Harlech_in_exile

TRUSt_NO_1 wrote: »

ETF's were developed by the banks to divert the public from investing in the real thing.......

Hmmm.... and why would the banks want to do that?

Loughton_Monkey

Harlech_in_exile wrote: »

Hmmm.... and why would the banks want to do that?

Because they think purely of customer satisfaction and service, over and above anything else like their own profits?