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Can an ETF go bankrupt?

Talk about declaring bankruptcy, the issues involved and it's suitability to your financial problems

Can an ETF go bankrupt?

Postby stiles » Thu Dec 22, 2011 5:08 am

I am just wondering with these 2x,and 3x ETFs... for example, pro shares offers MVV (2x), and UMDD, and UPRO (3x). I wonder what the risks of these ETFs are. Of course, I understand that these ETFs magnify disasters, but as we know from history, except for the bankruptcies of a few companies, the overall market eventually recovers from disasters. I am wondering if it is possible for these ETFs to ever go bankrupt. Or perhaps they could only ever go bankrupt if proshares goes bankrupt?
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Can an ETF go bankrupt?

Postby roosevelt » Thu Dec 22, 2011 5:09 am

"the overall market eventually recovers from disasters." is not really true. The American market has always recovered from disasters but globally it surely is not true. In fact, of the ten largest stock market in the world in 1900, four of them went to 0 meaning that you lost all your money and had to start over.

For your original question, you don't mean can the ETF go bankrupt. You mean could it eat all your money. The answer of course is yes. From the ProShares prospectus -

"Further, because the Fund includes a multiplier of twice
(2x) the Index, a single day movement in the Index approaching
50% at any point in the day could result in the total loss of a
shareholder's investment if that movement is contrary to the
investment objective of the Fund, even if the Index subsequently
moves in an opposite direction, eliminating all or a
portion of themovement. This would be the case with any such
single day movements in the Index, even if the Index maintains
a level greater than zero at all times."

I actually think there might be something that would save you in the spot that the prospectus is talking about. Before you lost all your money, you would get stopped out of swaps and get margin calls the fund couldn't meet with futures contracts (which would presumably stop them out too). That means in a 2x fund, if the market went down 50% at least a little slowly you might save some of your money. Maybe...
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Can an ETF go bankrupt?

Postby kinsella » Thu Dec 22, 2011 5:19 am

Some additional thoughts to add to JoeyV.

Don't forget that these 2x & 3x products are meant to be used for day trading. The 2x & 3x calculations are only good for a day. There is a danger holding them for more than a day, especially long term. These are based on derivatives, not stocks. In addition, I'd like to 2nd the thought that the market doesn't always recover. That's a very dangerous assumption. There may be some history to back it up.... unfortunately reality doesn't.
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Can an ETF go bankrupt?

Postby sancho60 » Thu Dec 22, 2011 5:25 am

Per se, no. The ETF would not go bankrupt. But look, the ETF has no asset, so it would last for ever. So far, it's only a number, right?

A friend of mine is still holding on some large quantity of GE stocks that he'd bought some years ago. His purchased price could well be in the $60 range. Whenever he asks experts, financial analysts, the general answers have always been, 'No, GE is one one the biggest companies in the world, it won't have any problem'.

Those people are right, GE won't have any problem. What is the reality? Only he has the problem.
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Can an ETF go bankrupt?

Postby horton » Thu Dec 22, 2011 5:39 am

I am pretty sure that one or two of those 2x or 3x bull funds got reset to a different amount per share when it got down to low, in other words, an investor would have lost plenty of money holding on to it, but the fund didn't lose, it just got reset.

Just imagine how these 2X or 3X bear funds are decimating the stock prices! I would never invest in stocks any longer with all these short ETF's and individual short sellers stealing the value of stocks.
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Can an ETF go bankrupt?

Postby orsen » Thu Dec 22, 2011 5:53 am

Interesting question. I do know that a lot of ETFs in the past have gone out of business--liquidated. I imagine that that might happen before worse came to worse. As the net assets dropped, most would flee causing a further drop and eventually the sponsors would through in the towel and liquidate. I quite imagine that MF Global caught quite a lot of people by surprise too.
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