Until today, I believed a plain vanilla ETF (not an ETN) was an excellent and SECURE way to track the performance of a stock index. Today, I was horrified when I read this article http://ftalphaville.ft.com/blog/2010/09/18/346406/can-an-etf-collapse/ From my understanding of this article, they are talking about a plain vanilla stock etf tracking the performance of a stock index, i.e., from my understanding, the ETF is supposed to hold the underlying stocks = physical stocks of the companies that make up the index (i.e. this etf is NOT a complex or exotic product based on swaps or other derivatives). I thought holding such a vanilla ETF was equivalent to owning the physical stocks of the companies making up the index. However they explain in this article, you can buy shares of an ETF where the underlying stocks DO NOT EXIST as you might buy them from a short sellers who makes a promise to create more shares at a later date when they cover their short positions. I am not sure to understand properly, but it seems that when you buy the ETF from a short seller, you are buying something virtual and that means you buy nothing??? Therefore if there are lots of ETFs short sellers, the price of the ETF can deviate enormously from the price of the index and in the worst case scenario, the value of the ETF would go to zero. If the price of the ETF was enormously decorrelated to the price index, or if the ETF collapse or cease to exist for any reason, I would have thought that I would have been able to sell the company stocks in the market. But since I've bought a share of the ETF from a short seller, I don't own the stocks and I don't own anything really!!! Is it total bankruptcy??? I also read an article about what is called "ETF death watchlist", I am not too sure what this is about. It seems this is a list of ETFs that are likely to close and I read investors are advised to get rid of these etfs on death watch list as the etf could close. I am not sure in the etf death watch list is related to the etf collapse article. I am new and trying to learn about ETFS, and very confused. Can someone clarify if etfs are secure instruments, are they regulated by the FSA in the UK or the SEC in the US? When you buy a share of an ETF, is that really possible that you don't own the underlying stocks of the companies if you buy the ETF from a short seller? This article might be rubbish but I've found others similar articles when typing "ETF collapse" in google, so I am in doubt and very very confused! I hope someone with some expert knowledge can clarify the matter.