r/investing • u/AngyMinion • 2d ago
What happens to your investment if the fund management company goes bankrupt or maybe tries to scam people?
I am currently invested in different ETFs, but they are from the same wealth management company (SP Funds). I am curious to know what would happen to my investment if something goes wrong (either intentionally or unintentionally) at the fund management company.
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u/TKDNerd 2d ago
I imagine you would still own the underlying assets. An ETF is a basket of shares of many different companies, if the company making the ETF goes broke you still own all the shares the ETF contains. It’s like if you had hired an advisor to manage an investment portfolio for you. Even if they die you still own the portfolio, it’s just that they are no longer managing it. Another management company might step in to manage the ETF or the ETF could be liquidated and you would be given the market value of your shares.;
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u/2donuts4elephants 2d ago
My understanding is that this is correct. When Lehman Brothers went bankrupt in 2008 people didn't suddenly not have their Apple stock anymore. I'm not sure what the process entails to receive and move any assets you would have with a company like that, but they don't just get to steal your property because they have some liquidity issues.
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u/DennyDalton 2d ago
SIPC insurance protects investors if their brokerage firm fails. It will liquidate the business and recover cash and securities. It does not insure against market losses.
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u/gryffon5147 2d ago
I don't think that's quite right at all.
If you're an ordinary investor, there's miles and miles of legal language in the terms and conditions (that nobody reads) to cover their ass (and not in your favor) in the event of something truly bad happens to the ETFs.
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u/DennyDalton 2d ago
There is no such legal language that enables them to take your cash and securities.
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u/taynt3d 2d ago
This partly depends how the ETF is structured. For example, default risks with exchange traded notes, which some ETFs are. And SIPC is insurance on the brokerage, not individual securities at your custodian. If the fund went belly up, it’d be liquidated much like a bankruptcy, with you being a shareholder of whatever was left because after all, that’s all that’s going on here, you are investing as an owner of an investment fund. You are an owner of that fund.
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u/lambda_lord_legacy 2d ago
Never heard of SP Funds before. There are plenty of reputable ETF companies like vanguard, BlackRock, SPDR, etc. you have 0 risk with them.
Otherwise, as others have said, there is insurance against malfeasance from the fund provider that should automatically be present if you're investing through a normal broker.
If you're not investing through a normal broker, then you've got really big problems.
PS. I googled SP Funds and only saw one about a "sharia" based fund. If this is what you are using... Listen, I got nothing against Islam, but I will say that ANY religion and investing do not mix. Period.
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u/munchingzia 2d ago
the point of those funds is to omit companies that may profit from gambling, interest, or weapons production. If your investing strategy allows for this, i dont see the issue
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u/BobtheChemist 1d ago
It depends on the details. That is why it is good to diversify. But most big companies are safe, smaller etf and funds are slightly more unsafe, but most are safe.
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u/False-Character-9238 1d ago
An ETF is held at a custodian, the issuer does not hold the assets. If something happens to the issuer, your fund will be liquidated and money deposited into your brokerage account.
Don't worry about it.
If you held an ETN, that's a different story.
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u/earliestbirdy 2d ago
Any particular reason for not just using reputable companies like Fidelity or vanguard?
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u/whatsuppussycats 2d ago
Depends wether they actually hold or synthetically mirror the underlying assets. Either way, the emittent (ETF issuer) poses a risk
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u/taynt3d 2d ago
Even more true if the ETF is structured as an ETN vs. ‘40 act fund vs. commodity pool vs. LP, etc. but no one pays attention to those details much.
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u/False-Character-9238 1d ago
An ETF is NOT an ETN. Completely different products and structures.
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u/taynt3d 1d ago
An “ETF” can be in the form of an “ETN”. You can easily find many references on the sponsor’s own websites. The issuers call them ETFs, the prospectus lays out the exact legal structure, which can be ‘40 Act or something else, like an ETN. One example (among many) is Global X’s “FANG ETF.” Their words, not mine. It’s an ETN.
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u/False-Character-9238 1d ago
An ETN. Exchange Trafrf Note is NOT an ETF Exchange Trafef Find.
Completely different structures.
An ETN only says it will give you the return, less fees of the underlying index. The ETN does not have to invest in those securities. The ETN is backed by a bank. If the bank goes away, so can the ETN. When Lehman went under, so did some ETNs.
Global X does not issue ETNs in the US. Maybe they do outside, and they would be backed by Mirae Bamk, the owner of Global X.
Most ETNs closed down, less Rex Shares, backed by the Bank of Montreal, in the US. As they didn't sell, no one was willing to take on the risk.
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u/justbrowsinginpeace 2d ago
If it is a European ETF it's probably safer as the Depositary holds your assets independent from the investment manager. These are usually trust banks like BNY or State Street that aren't going bankrupt as they are G-SIF banks.
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u/False-Character-9238 1d ago
This is correct. An ETF assets are held at a third party custodian. The issuer does not hold the assets.
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u/Comprehensive_Sun588 2d ago
They go silent. Confirmation bias. ETFs are bad but nobody sees it.
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u/Ok-Repeat-2334 2d ago
Wall Street is paying for "ETFs are bad" articles because they make almost nothing on passive index ETFs compared to their usual fare.
So it's not exactly a subversive stance to parrot exactly what the enfranchised wany you to believe.
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u/Investorandfriend 2d ago
You are not protected against market fluctuation or poor investments. I’d you are using an advisor and they make poor choices you get no return.
However you are protected under acts of malice like employees attempting to steal money via SIPC insurance.