ETF security and financial firm bankruptcies

[timtak]

I bought some index based ETF's recently. (Oops!)

But the recent decrease in the price of shares was not worrying me all that much because it is meant to be a long term investment (15 years or more) and if the market has not picked up by then I am not sure I will need the money anyway.

I bought whole market index ETF to be secure. I understood I was investing in the whole index. So even if a few companies go bankcrupt, the ETF should be fine, because I have invested in a couple of hundred companies. I have "spread".

But then I got to thinking....

What if the financial firm that sold me the ETF goes bankrupt?

Is the ETF only as safe as the company that sold me the ETF?

If so then in the present financial climate where investment banks are going bankrupt, my ETF does not seem like a secure investment. I might have been, or be, better off spreading my assets myself.

My question is, are ETF's only as secure as the firm that is selling them, or are they as secure as the market segement/index which the represent?
Tim

 

[timtak]

Bump, jikores what have you.

I have looked at all the descriptions of ETF's on the net,
http://en.wikipedia.org/wiki/Exchange-traded_fund
http://money.cnn.com/2005/05/31/funds/etf_prosandcons/index.htm
http://www.forbes.com/finance/feeds/mstar/2005/06/24/mstar1_11_23477_132.html
http://www.altruistfa.com/etfs.htm
http://www.schwab.com/public/schwab...he_hype.html?refid=P-1590074&refpid=P-1590177
http://www.schwab.com/public/schwab...unds/five_myths_of_exchange-traded_funds.html
(I do not endores the or take responsibility for the the material in the above hyperlinked sites) and while a lot of people are raving about them, and all mention that they can be very diversified, no one is talking about what seems to me to be the weak link.

No matter how diversified they are, if the investment bank that sold them to you does a Lehman Brothers, or worse, if the bank goes complete bankcrupt with debts greater than assets, then you may be left with zip, I presume.

Or am I wrong? Are we insured against this? Will the title of the shares that make up the fund become the property of the invidual stakeholders (ETF investors) should the investment bank belly up? If so then phew. If not then now is a risky time to be holding ETFs.

With share prices so low I might as well buy shares in a few blue chips and diversify for myself. I won't be as diversified as the whole index, but the stock will not depend on the survival of one investment bank.

Is this the secret achilles heel of ETFs?

I am not a financial advisor. I know nothing about anything and I am a fool.

 

[ymlam]

Hi Timtak

I have the same thoughts as you regarding the security of one company, but was somewhat dissappointed that there is no response to your emails.

I am tossing over what is the best option for retirement, a self managed in with a large portion invested in ETF in the long term or a managed fund. I am not one who monitored individual company performance but do take an interest in overall state of the economy.

The obvious main difference is low fees vs having to setup your own audited company to managed the fund. In both cases you are really relying on the health of one company.

Any comments.

ymlam

 

[Julia]

I am tossing over what is the best option for retirement, a self managed in with a large portion invested in ETF in the long term or a managed fund. I am not one who monitored individual company performance but do take an interest in overall state of the economy.

If you don't have any interest in actually managing your investments yourself, why are you considering a SMSF?

 

[ymlam]

If you don't have any interest in actually managing your investments yourself, why are you considering a SMSF?

In both managed fun and SMSF the main control is in the proportion in each assets class. I am comfortable in making that decision and make changes from time to time.

In SMSF, the fees are lower. Many consider that the average fund manager do not outperform the index. Stock market index are a lot more easily monitored, with financial news and commentarily each day. It is simply the state of the economy. The stock market is considered one of the better investment in the long term. The index is simply the average performance of the stock market. In a managed fund you pay a higher fees and you trust one particular firm's judgement. It may be fine in the next two years, but how can you really know in the long term?