facebookDo ETFs fail? - Seedly

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Kenneth Lou

07 Jul 2020

Co-founder at Seedly

What an interesting question.

The short answer is No, if you are buying a proper ETF fund that purhcases the underlying stocks of the index you are tracking. I'm talking about specifically Index ETFs! (eg the S&P500 and the STI ETF)

However, if you do buy some version of synthetic ETFs by fund houses, you will need to find out the reputation of the fund house and whether their Assets under management are legitamate, as they may not own the real underlying stocks in that ETF. In this case the ETF may fail.

You can find out more about Synthetic ETFs here: https://www.investopedia.com/terms/s/synthetic-...

A synthetic ETF is an asset designed to replicate the performance of an underlying index using derivatives and swaps rather than physical securities. Providers enter an agreement with a counterparty – usually an investment bank – that ensures future cash flows gained by the underlying benchmark are returned to the investor. In other words, the synthetic fund tracks the index without owning any physical securities.

The first synthetic ETF was introduced in Europe around 2001. It remains a popular investment in European markets, but only a small number of asset managers issue synthetic ETFs in the United States. This is due to specific regulations enforced by the US Securities and Exchange Commission in 2010 that prohibits the launch of new funds by asset managers not already sponsoring a synthetic ETF.

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