What happens if an ETF shuts down?
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
ETFs, like mutual funds, are often lauded for the diversification that they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to volatility. The potential for large swings will mainly depend on the scope of the fund.
A closed fund may stop new investment either temporarily or permanently. Closed funds may allow no new investments or they may be closed only to new investors, allowing current investors to continue to buy more shares. Some funds may provide notice that they are liquidating or merging.
An ETF shutting down is not the end of the world. The fund is liquidated and shareholders are paid in cash. It's not fun, though. Often, the ETF will realize capital gains during the liquidation process, which it will pay out to the shareholders of record and that could mean an unnecessary tax burden.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
The single biggest risk in ETFs is market risk.
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.
"Some ETFs are much more susceptible to closure than others," says Emily Doak, CFA, director of ETF and index fund research at the Schwab Center for Financial Research, "so it's important to be aware of certain characteristics when researching funds for your portfolio."
Can an ETF lose all its value?
The Bottom Line
Investors who buy index funds will not lose all of their investment. That's because they're investments buoyed by hundreds or thousands of underlying securities. As such, they're highly diversified, making it almost impossible for them to reach a value of zero.
A single ETF can contain dozens or hundreds of different stocks, or bonds or almost anything else considered an investable asset. Since ETFs are more diversified, they tend to have a lower risk level than stocks.
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure.
Because they rebalance daily, leveraged ETFs usually never lose all of their value. They can, however, fall toward zero over time. If a leveraged ETF approaches zero, its manager typically liquidates its assets and pays out all remaining holders in cash.
"They all go to 0 over time." "If you hold them for more than a few days, you will lose money." The 3x Long Nasdaq 100 ETF (TQQQ) was launched in February 2010, over 8 years ago. Since its inception, it has advanced 4,357%, versus a gain of 378% for the unleveraged Nasdaq 100 ETF (QQQ).
It's important to understand what is meant by “decay” in the context of leveraged ETFs. When we say that a leveraged ETF decays, we mean that its returns can diverge significantly from what we might expect based on the performance of the underlying index.
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
1. Vanguard S&P 500 ETF (VOO -0.84%) Legendary investor Warren Buffett has said that the best investment the average American can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF.
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Are ETFs safe for retirement?
The Cons of Investing in ETFs for Retirement
Risk: ETFs are not risk-free investments, and there are times when even a diversified portfolio can produce negative returns, which was the case for 2022 and early in 2023, when most stock and bond ETFs saw declines due to inflation and rising interest rates.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
So, what if Vanguard's brokerage fails? First, the chances of Vanguard failing are miniscule. That said, let's talk about brokerage accounts for a minute. Brokerage accounts are not backed by the FDIC but by the Securities Investor Protection Corp (SIPC), which protects accounts up to $500,000.
The technical term for this is bankruptcy-remote. The ETF's are specifically designed so that they are legally separate from the company that manages and creates them. So if Blackrock goes under, the ETF's are legally separate and would be unaffected by the bankruptcy.
Vanguard is the king of low-cost investing, making it ideal for buy-and-hold investors and retirement savers. But beginner investors and active traders will find the broker falls short despite its $0 stock trading commission, due to the lack of a strong trading platform and accessible educational resources.
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