What happens if ETF goes bust?
You're forced to sell or take liquidation proceeds, which can create a tax burden or lock in investment losses. You may incur a capital gains tax on profits if the ETF's in a taxable account, that is, a non-retirement account.
So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian. This separation is imposed by the European regulatory framework that governs financial services. In the event of a bankruptcy, another provider will then take over management of the fund.
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.
In other words, you could potentially be liable for more than you invested because you bought the position on leverage. But can a leveraged ETF go negative? No. If you own a leveraged ETF you can't lose more than your initial investment amount.
In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
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.
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.
Commissions and Expenses
Every time you buy or sell a stock, you might pay a commission. This is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investment's performance.
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.
Can I lose all my money with leveraged ETF?
Leveraged ETFs amplify daily returns and can help traders generate outsized returns and hedge against potential losses. A leveraged ETF's amplified daily returns can trigger steep losses in short periods of time, and a leveraged ETF can lose most or all of its value.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Theoretically, any investment, including QQQ, can experience a decline in value and potentially become worthless. However, it is important to note that QQQ represents a basket of established companies listed on the Nasdaq Stock Market, which makes the likelihood of it going to zero highly improbable.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
The single biggest risk in ETFs is market risk.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
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.
All investments carry some risk, and Vanguard ETFs are no exception. But Vanguard is a fund provider with a reliable company history, and well-diversified ETFs tend to be safer than individual stocks.
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.
What is the safest investment with the highest return?
- 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.
- ProShares Bitcoin Strategy ETF (BITO)
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- VanEck Semiconductor ETF (SMH)
- Invesco S&P MidCap Momentum ETF (XMMO)
- SPDR S&P Homebuilders ETF (XHB)
- Invesco S&P 500 GARP ETF (SPGP)
Can an S&P 500 index fund investor lose all their money? Anything is possible, of course, but it's highly unlikely. For an S&P 500 investor to lose all of their money, every stock in the 500 company index would have to crash to zero.
However it is unlikely that you will recoup all your money unless the price of ETF surpasses the value you bought in the ETF. Can I lose money in stock more than I invested? Yes, it is possible to lose more money in stocks than you initially invested.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
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