Risks in investing in ETFs

Hi James,

ETF investors generally should not lose their money if the issuer goes broke, because ETFs are legally separate from the issuer’s balance sheet. Hence If an ETF issuer goes bust, you still own your investment. The fund’s assets are held independently, so you are insulated from the issuer’s financial health. You are protected as below:

• ETFs are structured as separate legal entities or trusts: The assets (stocks, bonds, etc.) inside the ETF are held in custody by a third-party custodian, not the issuing company (e.g., Vanguard, iShares, BetaShares, etc.). Hence, if the issuer goes bankrupt, the fund’s assets are still safely held on behalf of investors.
• You own the underlying assets albeit indirectly, your ETF units represent a share of the actual basket of securities, not a claim against the issuer.
• Regulated structure, in most countries (like Australia, the US, EU, etc.), ETFs are heavily regulated to prevent issuer default from affecting fund assets.

In most cases, effectively ETFs are only as risky as the assets they contain, and don’t necessarily pose an additional level of risk on top.