What happens to an ETF (exchange-traded fund) if its issuer goes bankrupt?
Exchange-traded fund
It's a common concern that people have about exchange-traded funds (ETFs): what happens to the fund if its issuer goes bankrupt? It's not a stretch to imagine a situation where the fund does well, starts drawing in more and more investors, and then suddenly the company that runs it goes belly up. More than the company going bankrupt, though, what would happen is that the whole fund would be liquidated.
Creation and Redemption
As shares are bought and sold on exchanges, an ETF uses a process called creation and redemption to match the demand for shares with supply. This is one of the reasons that ETFs have lower fees than mutual funds: by operating this way, they don't need as many employees monitoring trades as a mutual fund does.
This might make one think that their investments are less safe
This might make one think that their investments are less safe than those in a traditional mutual fund, which holds onto its shares and doesn't redeem them. However, when an ETF issuer goes bankrupt, the shareholders aren't actually at risk of losing their money—the value just changes. Some people worry that they'll lose money if they buy into an ETF when it's doing poorly only to find its value has dropped significantly after its issuer goes under.
Can be a great way to invest in a diversified pool of assets
An exchange-traded fund (ETF) can be a great way to invest in a diversified pool of assets without having to buy each asset individually. An ETF is made up of a basket of assets, and its price tracks these assets' individual prices. However, sometimes an ETF's issuer goes bankrupt. When this happens, investors may have questions about what happens to their shares. If the issuer is liquidated, then all of its assets will be sold and the proceeds distributed to the shareholders, but you may want to know if there are other options for your investment.
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