What are the chances an ETF will go Madoff on you?

I'm trying to figure out the risk a company like WisdomTree will just say one say 'sorry, there is no money and everybody lost everything'

 

zero chance for ETFs, slight chance for ETN's.

 

why zero? you trust the regulator?

 

There are two parts to your comment. Wisdom Tree is an asset manager of a broadly diversified range of ETFs. I didn't realize until I saw your post and went online to check them out that they are actually publicly traded on the Nasdaq, ticker symbol WETF.

So there are two risks: one that the publicly traded firm, Wisdom Tree, mismanages their own affairs and says "there is no money and everybody lost everything", but that would only apply to stockholders of the firm, not the owners of the shares of each ETF issued by Wisdom Tree.

The other risk is that an ETF issued by Wisdom Tree is not managed appropriately, in which case the ETF could lose value, and thus pose inherent risks to a buyer of that ETF. For example, the stocks within a narrow sector of that ETF all go down, and hence "there is no money and everybody lost everything."

 

I'm actually talking about fraud risk at the ETF level, fooling the auditor etc

 

In what way? Are you implying that the NAV would somehow be totally out of whack with the underlying securities in the ETF?

 

Something like that. I don't see anything that prevents an ETF issuer to take the money to do other things, create fake reports, fool the auditor, etc. Its a low chance for sure, but I don't see this listed as a risk factor for ETFs.

 

It isn't a risk factor. It's impossible

 

I have wondered this myself. I think it is very very unlikely, but possible. It seems that typically the underlying securities are held by a custodian (in order to mitigate exactly this type of risk). For example, WisdomTree's custodian is BNY Mellon -- or at least was in 2012, see http://www.sec.gov/Archives/edgar/data/1350487/000119312512255257/d361108d4017f2.htm. So while there isn't much risk in this case of the ETF issuer committing fraud, there is nothing as far as I can tell to keep the custodian from running off with the funds. So I suppose to measure 'Madoff risk' for an ETF is equivalent to what you think counterparty risk of the custodian is.

 

Good info. With BNY as custodian the risk definitely decreases, a fraud at that level seems more difficult since banks tend to be more regulated and its not the douches at the SEC who oversee them