Can an ETF collapse?

oops sorry I read too fast!

 

Why?
Just because the brokers can't charge margin interests and there are no margin-calls or stop-losses thus generating more commissions?
Follow the money.

 

You are missing the point and talking about the Secondary market not the Primary. An Exchange Traded Fund can only collapse if the value of the underlying securities are worthless. For example, if SPY’s underlying value (a stock basket of the S&P 500) were to collapse to zero (not possible due to circuit breakers) then the SPY would be worth zero. Another example is a “crash up” in a levered ETF. If the RGUSFL (Russell 1000 Financial Index) were to move up 33% or more in a single trading session then the underlying components of FAZ would be worth zero and FAZ would collapse. A 33% move is highly unlikely but possible in a slow motion type crash-up. We also have upward circuit breakers so this would have to be over the course of the day.

Short shares and short interest have nothing to do with a collapse of an ETF. The example above is not possible- dividends are paid in cash and do not create extra shares. You can DRIP and use your dividend income to purchase additional shares however they cannot be created out of a dividend. (to be honest I don’t know if you can DRIP into a larger short quantity, I don’t believe so but honestly don’t know)

There are never any “fake” shares of ETFs. Also, the Fund is fully owned by the shareholders and therefore cannot be run into bankruptcy by the Asset Manager or anyone else.

 

ETN are dangerous. ETF have more right.

Byut tehn again, rememebr the GM bailout. Bondholders, who shou;ld have come first got screwed


Point being: you can always get screwed no matter if law says you shouldnt have....

absolute safety comes with food, water and guns

 

There were problems for a LSE listed "short oil" ETF during the oil price meltdown in 2008.


When the big crunch came for contract counter-party (AIG)...
... trading of the ETF was suspended on the LSE.


During the height of the panic; the ETF was trading off-exchange as junk.

Exchange Trading of the Fund; was only re-instated after the Fed bailed out AIG.


Buyer beware and don't forget to read the fine print!

 

The real concern is the Leveraged ETF's. When you adjust pricing daily on these things, the numbers naturally take over. Start with $100 - triple levered, market goes down 10%, this goes down 30% to $70. Then up 10%x3 to $91. Keep repeating this, and yes, they can go to zero....but they do reverse stock splits to make up for this...still a loser to hold long positions overnight.

For example, the FAS (3 x Bull) is down 22% for the year, The FAX (3x Bear fund) is down over 10% - how would that happen? The SPY is down only 6%.

From the ProShares prospectus:

Trading of Ultra ETF's: The Ultra ETF's, by design, are basically for Day Trading only. Important Information About the Funds
The UltraPro and UltraPro Short ProShares offered in this Prospectus (each, a “Fund” and together, the “Funds”) seek leveraged or inverse leveraged investment results for a single day only, not for longer periods.



Don

 

I don't know if this has already been mentioned, but here is the correct answer...excellent argument:

http://www.indexuniverse.com/hot-topics/8783-credit-suisse-etf-mythbusters.html

 

"...but they do reverse stock splits to make up for this..."

Yep, they get knocked down, and then do reverse splits, amazing.

http://www.indexuniverse.com/sections/news/8765-direxion-sets-reverse-splits-on-6-etfs.html

 

I have 1000 shares of FAZ and I have sold covered calls. Is it best thing for me to sell the shares and take whatever losses. The options expire worthless on 18th Feb. Please comment. Thanks

 

According to Drexion's statement:

"All the reverse splits apply to shareholders of record after the close on Feb. 23, and post-split shares will be available to investors on Feb. 24, the company said."

You at least got premium on the covered calls to reduce your cost basis, so that's yours to keep regardless. The split won't take place until after options expiration.

What you should do depends on your net cost basis and if you're willing to stomach the future volatility of the shares. FAZ will reprice at 500% markup, and you'll have 200 shares instead of 1,000.

Then, it depends on what happens to the financials. If this market continues up, then FAZ will continue to drop post-split, and the price volatility in the shares will become more defined given the reduction in float.

I've been burned by these double and triple inverse funds as well, so I fully understand your position. However, only you can determine what is right based on your account size and acceptable drawdown limitation.

At some point the market is going to correct, regardless of Uncle Ben's continued money printing.

Always remember this: "the market can remain irrational longer than you can remain solvent."

Good luck...