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Is there a way that a passive, large, liquid index fund can completely devalue due to some mechanism (as longs as the stocks it is tracking do not, obviously)?

For example, any individual stock can go out of existence (value = 0.00€) simply due to its respective company going bankrupt. Is there any way this could happen to an ETF?

Is there any possibility at all for an ETF to "go bankrupt" without the underlying assets going bankrupt. For example, is there any thinkable scenario in which the company managing the ETF goes out of business and the ETF suddenly disappearing (without being transparently shifted to some other company, or something like that)

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As long as the underlying assets of a traditional unleveraged long ETF (stocks, bonds, gold, etc.) have value, the ETF will have value.

Where this does not hold true is if the ETF uses derivatives (options and futures) and debt to provide leveraged returns to the up or down side (+2x or +3x or -2x or -3x).

  • The spirit of the question is supposed to be: is there any possibility at all for an ETF to "go bankrupt" without the underlying assets going bankrupt. For example, is there any thinkable scenario in which the company managing the ETF goes out of business and the ETF suddenly disappearing (without being transparently shifted to some other company, or something like that)? – AnoE Jul 1 '18 at 13:04
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    @AnoE - And your point would be what? – Bob Baerker Jul 1 '18 at 14:02
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Fraud is a larger failure mode than anything to do with the ETFs themselves: someone setting up a fake ETF, or claiming to be buying ETFs on a customer's behalf and just pocketing the money, would be massively more likely than an ETF going bankrupt.

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ETF has the Sponsor of the ETF scheme. The Authorized Participant. The Authorized participants provide liquidity and create or redeem the units.

So if the Authorized participants go bankrupt; then it can easily be replaced by others. They hold unsold ETF's and the underlying stock is not held by them.

The ETF sponsor is created as a special purpose vehicle or trust; generally they recover the cost by stated fund fees. These would cover marketing, management and support payrolls, etc.

It is unlikely that ETF sponsor could go bankrupt because there isn't much that can go wrong. Lets say goes bankrupt; say there is some unfair trade practice against the sponsor and are slapped with a heavy penalty; that the current fee can't cover for foreseeable future ... I guess the ETF sponsor will try to make this good with its own fund. Although I can't find any literature; but it looks the ETF sponsor can't take more than "Stated Fees". So the subscribers would be protected to that extent.

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