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ETF protection / ring fencing / etc

Index tracking funds and ETFs
onthemove
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ETF protection / ring fencing / etc

#441335

Postby onthemove » September 10th, 2021, 6:56 pm

A while back I remember reading that there are various types of ETFs, some directly holding a basket shares ('physical') while others ('synthetic') use derivatives, etc, to attempt to replicate the funds aims. The latter often being considered more risky.

Personally I stick to the physical ETFs, but can't help feeling rather over exposed to ETFs issued by the same 'providers' (iShares and Vanguard).

How worried should I be about having a lot of money across multiple ETFs from the same provider?

I mean, an individual ETF trades like an individual company as far as buying and selling is concerned. And surely if one ETF is synthetic and another physical, from the same provider, does this imply there's some kind of legal separation of 'entity' between different ETFs from the same provider?

I'm thinking here mainly of the risk of fraud, or the ETF provider - Vanguard or iShares, etc - hitting trouble themselves.

Are individual ETFs operated separately, almost or even fully as separate companies? Or if e.g. iShares went bust, would iShares creditors have a claim on the funds within the whole range of iShares ETFs?

In essence, does having multiple ETFs from the same provider carry a higher risk of a catastrophe vs holding the equivalent ETFs from separate providers? Or is each ETF, even when marketed as being from the same provider, effectively just as separate and ring fenced as if it were from a different provider?

Can ETFs from the same provider share administrative staff? I'm thinking here, if someone on the inside were perpetrating a fraud within one ETF, is there a risk that the same person could be doing the same across multiple ETFs? Or would each ETF have their own staff, thereby limiting the risk from one fraudulent individual to one ETF?

If it makes a difference, I'm mainly interested in the iShares and Vanguard ETF structures, which I believe are all registered in Ireland.

Thanks.

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Re: ETF protection / ring fencing / etc

#441341

Postby Lootman » September 10th, 2021, 7:07 pm

iShares is part of Blackrock these days. Before that it was part of Barclays and before that, part of Wells Fargo. So iShares itself would not go bust; the risk is that Blackrock would. As the largest asset manager on the planet one might assess that risk as tiny. Or take the view that if Blackrock fails then the world has gone to hell and you might have other things to worry about.

Vanguard is super solid as well, and is the largest retail fund manager on the planet. The other major ETF player is State Street bank, and its trust and custody business also makes it highly unlikely to fail. All three of these companies barely skipped a beat while the financial crisis was taking down Lehman, Merrill Lynch, Bear Stearns and so on.

As for the distinction between physical and synthetic, again I think the risk is tiny. One distinction is to look and see what types of derivatives are used. If they are options or futures, then those are both exchange-listed, and the risk is trivial unless you think the NYSE, LSE, Nasdaq, CME or CBOE could fail. If instead those derivatives are forwards or swaps, then those are over-the-counter instruments and there is credit risk with the counterparty. Same goes for ETNs which are really loan instruments whose return is linked to an index. That said when Lehman failed all its derivative positions were eventually successfully unwound.

I do not spend any time worrying about the viability of the $3 trillion market that is ETFs.

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Re: ETF protection / ring fencing / etc

#441433

Postby onthemove » September 11th, 2021, 11:57 am

Lootman wrote:iShares is part of Blackrock these days. Before that it was part of Barclays and before that, part of Wells Fargo. So iShares itself would not go bust; the risk is that Blackrock would. As the largest asset manager on the planet one might assess that risk as tiny. Or take the view that if Blackrock fails then the world has gone to hell and you might have other things to worry about.

Vanguard is super solid as well, and is the largest retail fund manager on the planet. The other major ETF player is State Street bank, and its trust and custody business also makes it highly unlikely to fail. All three of these companies barely skipped a beat while the financial crisis was taking down Lehman, Merrill Lynch, Bear Stearns and so on.

..

I do not spend any time worrying about the viability of the $3 trillion market that is ETFs.


I don't own a home, and after 20+ yrs saving and investing, my investment portfolio is becoming very large and I'm becoming lazier. So much so that a not insignificant amount of my total net worth is now in ETFs from iShares or Vanguard. And since I'm nearer the end of my working career than the beginning, rebuilding after a catastrophic loss (e.g. if all my iShares ETFs were wiped out) would definitely no longer be feasible.

The amount I have in some single ETFs on their own is rather large, and would be a big hit if any were to individually hit a major issue. But at the single ETF level, and with the reputation of iShares and Vanguard, I am comfortable with the level of risk (and my understanding of that level of risk) on an individual ETF basis.

I share your view that Blackrock and Vanguard are probably relatively 'safe' companies, but equally there's no such thing as absolutely safe. Unfortunately accounting scandals like Enron and such like seem to happen all too frequently. One company I held recently, when I looked into the history of the company seems to have recurring accounting scandals almost on a semi-irregular basis. Even Tesco wasn't immune.

So my concern is to understand what the risk is whereby any problem within a single ETF, or its parent provider - e.g. fraud, or insolvency of the parent company, etc - could result in losses across multiple ETFs from that provider at the same time as a result.

The seemingly obvious answer on the face of it is to simply choose ETFs from different providers. And I did try to do this, but it seems that each one I stumbled across that I liked the sound of, turned out not to have a UK listing. And I really don't want the hassle of international dealing if I can at all avoid it.

So I find I end up settling back to Vanguard and iShares all the time.

And I would just feel an awful lot happier if I could better understand the legal structure in which ETFs operate, specifically how separate - or not - each ETF from the same provider actually is (or isn't). Do the same staff work on multiple ETFs, such that if there's a bad apple amongst them, it'll likely affect multiple ETFs at the same time? etc.

At the moment, I don't feel my understanding of how ETFs are structured is good enough to enable me to adequately judge the risk of holding a large part of my net worth in multiple ETFs from the same provider. Hence why I started this thread to try to improve my knowledge in this aspect.

I can't help feeling that surely there must be some sort of fund level protection or ring fencing - I'd guess perhaps something similar to how UK stock brokers have to ring fence client funds etc, and in theory creditors can't make a claim on the client funds in the event of the broker going bust - but with the amount of money I now have in ETFs, I'm now looking for concrete information rather than my own suppositions, so that I can make a properly informed judgement of the risks.

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Re: ETF protection / ring fencing / etc

#441436

Postby Hariseldon58 » September 11th, 2021, 12:15 pm

The issue with Funds and ETFs is that they are often part of a much larger ‘umbrella’ fund. The risk is small but it is there.

My view is to have three brokers, one of which, ii, does not charge an ad valorum fee for holding oeics /mutual funds.

So Vanguard ETFs run from Ireland and some Vanguard funds run from the uk, the different legal structures also minimise the links between the two types of funds.

Throw in some world trackers from Fidelity, HSBC and a few active investment trusts etc and the risk is significantly diluted.

I’m more wary of synthetic ETFs, counterparts risk is to be avoided and you may find the ‘security’ held against the holdings may be very different in nature and could go badly in a crisis. It’s probably a more theoretical risk but since it’s easily avoidable, why bother.

In a disaster the problem may be lack of access to funds for a lengthy period rather than outright loss and a lot of stress.

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Re: ETF protection / ring fencing / etc

#441451

Postby mc2fool » September 11th, 2021, 1:10 pm

onthemove wrote:At the moment, I don't feel my understanding of how ETFs are structured is good enough to enable me to adequately judge the risk of holding a large part of my net worth in multiple ETFs from the same provider. Hence why I started this thread to try to improve my knowledge in this aspect.

I can't help feeling that surely there must be some sort of fund level protection or ring fencing - I'd guess perhaps something similar to how UK stock brokers have to ring fence client funds etc, and in theory creditors can't make a claim on the client funds in the event of the broker going bust - but with the amount of money I now have in ETFs, I'm now looking for concrete information rather than my own suppositions, so that I can make a properly informed judgement of the risks.

Indeed, as I have a large amount of my small fortune in Vanguard and iShares OEICs/ETFs, I'd be interested in that too, :) although, like others, I can't say I lose any sleep over it. Nonetheless, when I got to a certain amount of Vanguard investments I did make a conscious choice to switch to iShares for further investments of those types.

I guess my attitude to the risk of failure of the likes of Vanguard and iShares (along also with the risk of failure of a large mainstream broker) is, yeah, sure, it's very small, but let's not tempt fate by putting all eggs in one basket. So, for my passive portfolio I use Vanguard and iShares (and a smidge of SPDR), and for my broker I use iWeb and ii. And a third of each would be nice too ...

It's been pointed out that iShares is "part of" Blackrock, which indeed it is but that doesn't necessarily mean that iShares itself couldn't go bust. I would suspect that iShares is probably a wholly owned limited liability subsidiary company of Blackrock, and as such is legally separate from Blackrock for liability (and tax, regulation, etc).

If so then it could go bust itself and Blackrock just wash its hands of it -- legally at least, although I'd expect that Blackrock would most probably bail it out. However, on an admittedly only cursory search, I haven't found what the formal relationship actually is.

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Re: ETF protection / ring fencing / etc

#441754

Postby tjh290633 » September 12th, 2021, 11:35 pm

The problem with passive investing is that you are passive. You are carried along on whatever the manager of your particular fund does. He may be an automaton, blindly following the market, he may be trying to better the market, or he may just be trying to feather his own nest. You have no control. Somewhat better with an IT, where at least shareholders have a vote.

The current obsession with ETFs amazes me. I cannot see the attraction.

TJH

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Re: ETF protection / ring fencing / etc

#441759

Postby onthemove » September 13th, 2021, 12:40 am

tjh290633 wrote:The problem with passive investing is that you are passive. You are carried along on whatever the manager of your particular fund does. He may be an automaton, blindly following the market, he may be trying to better the market, or he may just be trying to feather his own nest. You have no control. Somewhat better with an IT, where at least shareholders have a vote.

The current obsession with ETFs amazes me. I cannot see the attraction.

TJH


The ETFs that I've chosen, I believe should be index trackers - the manager shouldn't be doing anything other than trying to track, as close as reasonably practical, the particular index that the fund says it will track in the prospectus. And I see it as entirely my responsibility to decide whether I want to invest in that particular 'thing'... if the index being tracked goes down, I hope the ETF value goes down accordingly.

All these ETFs (that I hold) are supposed to physically hold the shares, so on the whole, the manager's job should be relatively straightforward (though I accept that for practical reasons, the exact shares held might not match exactly 1:1 what is in the index, but I sure hope that is just execution pragmatism in practice and not any attempt to 'better the market')

I certainly hope the fund manager isn't trying to 'better the market', as that's not what the ETFs that I've chosen to invest in are about.

The ishares ETFs at least do show on the iShares website how closely they track the underlying index. For example ... https://www.ishares.com/uk/individual/e ... /251787/#/ click "View Full Chart" on the left and it shows how well it's tracking (in this case) the "EURO STOXX® Select Dividend 30 (EUR)"

The advantage of these tracker ETFs, in my view, is that they easily enable me to invest in a basket of shares in various countries and regions around the world, but trade just like a share on the london stock exchange, with the same low cost, easy to execute deals through my broker as any other share on the LSE.

And it does somewhat remove the hassle and frictional costs of trying to retain diversification... when I want to reinvest dividends, I can top up an ETF in a single trade that is the equivalent of many small individual top-ups on each holding in an HYP at the same time, with the cost of a single trade.

But the possibility of an ETF manager 'trying to be clever' and deviating from the stated aim of the ETF (or just outright fraud) is the kind of thing as to why I asked my original post... if a rogue manager did attempt something like that and really caused a disaster, is it - in practice - possible for that same guy (or girl) to be doing the same with multiple ETFs at the same time from the same provider? Or does each ETF have it's own separate staff to run it, etc?

At one extreme, it's not completely implausible to think that a whole ETF could just be run on a single worksheet in an Excel 95 spreadsheet, with each different ETF from the same provider just being tracked on adjacent worksheets in the same Excel spreadsheet file. And that 1 spreadsheet tracking all the same providers ETFs just being manually updated by one, single part time individual employed directly by the ETF provider with no legal separations or protections what-so-ever.

At the other extreme, particularly the size of some of the ETF funds and the % fee they charge on that huge fund size, they could quite plausibly have their own office, own completely separate limited company structure, and entire own staff, HR dept, etc, totally dedicated to that one fund, and with all the legal separation / protections / etc that a separate ltd company has, etc.

I hope this isn't going to turn into another HYP-esque scenario.... I came here just to ask (what I thought) was a straight forward question in relation to how ETFs are structured, and I thought this was the board to do so.

Maybe, if it turns out that the structure is closer to the excel 95 scenario where one individual could bring the whole lot down, then maybe I will change my mind on ETFs, or at least how much I hold with a single provider. But in this thread I wasn't really looking for any pros and cons of ETFs in general, just specifics on what the legal structure / protections / etc are.

Really I was hoping that this thread could stay on the topic of what protection or ringfencing, etc, if any, there is between ETFs from the same provider (and protection from creditors of the parent company if the parent were to go bust).

If you have some insights into those aspects, I'd genuinely be interested to learn more, as it's an area where I know my knowledge is a little below where it probably should be to enable me to make informed assessments of the risks.

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Re: ETF protection / ring fencing / etc

#441768

Postby Urbandreamer » September 13th, 2021, 7:25 am

onthemove wrote:The advantage of these tracker ETFs, in my view, is that they easily enable me to invest in a basket of shares in various countries and regions around the world, but trade just like a share on the london stock exchange, with the same low cost, easy to execute deals through my broker as any other share on the LSE.


Just a quick point. Many countries have restrictions on overseas share ownership. This fact is EXACTLY why some etf's do not hold shares in the index but instead use derivatives.

I'm not going to comment upon passive investing on this board, but you do need to be aware that you can't magic up some ideal investment. All you can do is invest in what is available.

There are a number of active investment trusts and funds that try to follow the growth in Vietnam or China. Some use derivatives while others invest in unquoted companies, specifically because of what I have mentioned. Investing directly in the index or companies in the index may NOT be possible in this case. World trackers must think about what they want to do with respect to the likes of China, Vietnam etc.

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Re: ETF protection / ring fencing / etc

#441805

Postby AleisterCrowley » September 13th, 2021, 10:07 am

tjh290633 wrote:The problem with passive investing is that you are passive. You are carried along on whatever the manager of your particular fund does. He may be an automaton, blindly following the market, he may be trying to better the market, or he may just be trying to feather his own nest. You have no control. Somewhat better with an IT, where at least shareholders have a vote.

The current obsession with ETFs amazes me. I cannot see the attraction.

TJH

If there's a fund manager trying to better the market it's not passive investing.
There's a lot of evidence that using a cheap index tracker provides better results for most people than trying to pick managed funds...

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Re: ETF protection / ring fencing / etc

#441822

Postby murraypaul » September 13th, 2021, 10:39 am

mc2fool wrote:It's been pointed out that iShares is "part of" Blackrock, which indeed it is but that doesn't necessarily mean that iShares itself couldn't go bust. I would suspect that iShares is probably a wholly owned limited liability subsidiary company of Blackrock, and as such is legally separate from Blackrock for liability (and tax, regulation, etc).

If so then it could go bust itself and Blackrock just wash its hands of it -- legally at least, although I'd expect that Blackrock would most probably bail it out. However, on an admittedly only cursory search, I haven't found what the formal relationship actually is.


If you look at the KIID for any of the iShares ETFs, at the bottom it will say what the actual fund ownership is.

So for example iShares Core S&P 500 UCITS ETF USD (Dist) says:
- The Fund is a sub-fund of iShares plc, an umbrella structure comprising different sub-funds. This document is specific to the Fund stated at the beginning of this document. However, the prospectus, annual and half-yearly reports are prepared for the umbrella.

- iShares plc may be held liable solely on the basis of any statement contained in this document that is misleading, inaccurate or inconsistent with the relevant parts of the Fund's prospectus.

- Under Irish law, iShares plc has segregated liability between its sub-funds (i.e. the Fund’s assets will not be used to discharge the liabilities of other sub-funds within iShares plc). In addition, the Fund’s assets are held separately from the assets of other sub-funds.

While iShares Core FTSE 100 UCITS ETF GBP (Acc) says:
- The Fund is a sub-fund of iShares VII plc, an umbrella structure comprising different sub-funds. This document is specific to the Fund stated at the beginning of this document. However, the prospectus, annual and half-yearly reports are prepared for the umbrella.

- iShares VII plc may be held liable solely on the basis of any statement contained in this document that is misleading, inaccurate or inconsistent with the relevant parts of the Fund's prospectus.

- Under Irish law, iShares VII plc has segregated liability between its sub-funds (i.e. the Fund’s assets will not be used to discharge the liabilities of other sub-funds within iShares VII plc). In addition, the Fund’s assets are held separately from the assets of other sub-funds

And for both:
- Manager: BlackRock Asset Management Ireland Limited

- The depositary of the Fund is State Street Custodial Services (Ireland) Limited

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Re: ETF protection / ring fencing / etc

#441841

Postby mc2fool » September 13th, 2021, 11:39 am

murraypaul wrote:
mc2fool wrote:It's been pointed out that iShares is "part of" Blackrock, which indeed it is but that doesn't necessarily mean that iShares itself couldn't go bust. I would suspect that iShares is probably a wholly owned limited liability subsidiary company of Blackrock, and as such is legally separate from Blackrock for liability (and tax, regulation, etc).

If so then it could go bust itself and Blackrock just wash its hands of it -- legally at least, although I'd expect that Blackrock would most probably bail it out. However, on an admittedly only cursory search, I haven't found what the formal relationship actually is.

If you look at the KIID for any of the iShares ETFs, at the bottom it will say what the actual fund ownership is.

So for example iShares Core S&P 500 UCITS ETF USD (Dist) says:
- The Fund is a sub-fund of iShares plc...
:
:
While iShares Core FTSE 100 UCITS ETF GBP (Acc) says:
- The Fund is a sub-fund of iShares VII plc...

Ok, thanks, that's interesting. I wonder what happened to iShares II to VI? :D

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Re: ETF protection / ring fencing / etc

#441876

Postby Lootman » September 13th, 2021, 2:08 pm

tjh290633 wrote:The problem with passive investing is that you are passive. You are carried along on whatever the manager of your particular fund does. He may be an automaton, blindly following the market, he may be trying to better the market, or he may just be trying to feather his own nest. You have no control. Somewhat better with an IT, where at least shareholders have a vote.

An ETF manager does not try and beat the market. They are judged on how closely they track the market. So out-performing by 5 basis points is considered worse than under-performing by 2 basis points. It is all about fidelity to the target index.

As the word "passive" implies, an ETF manager does not do very much since, like other index funds, trackers mostly self-manage. With open-ended trackers there needs to be purchases and sales because of cashflows in and out of the fund. But with ETFs that is not a factor.

What an ETF manager does do is try and reduce costs and variance from the index. They might do this by lending out the underlying securities. And some deftness is required to handle corporate actions and index promotions and relegations. But otherwise there is not much to do, which is why ETFs typically have low costs.

tjh290633 wrote:The current obsession with ETFs amazes me. I cannot see the attraction.

Since I happen to know you keep detailed records of your portfolio history, I would invite you to look at them in comparison to an appropriate index over the same time period. Even if you have out-performed that index, and I am willing to believe that you have, such an exercise will enable you to see how much of your returns were from beta (the move in the equivalent index) and how much was alpha (the extra return you created over that index).

I would guess that your beta number is higher than your alpha number. That beta number is what you would have returned if you had instead simply bought an ETF at the beginning (they did not exist back then but you know what I am saying). That market return would have been yours with no effort or time expended over the decades rather than the hundreds (thousands?) of hours you personally invested in learning about investing and managing your portfolio.

Now if like me you enjoy this stuff then maybe that doesn't matter. But for many it would matter as they would rather do something else with their time. And almost by definition most individual investors will not out-perform the index as you have done.

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Re: ETF protection / ring fencing / etc

#441881

Postby scrumpyjack » September 13th, 2021, 2:18 pm

An ETF is a wrapper, ie a structure for an investment fund. It does not necessarily have to be an index tracker although most are. Vanguard also run some actively managed ETFs.

The advantages of the ETF structure are generally lower fees and no discount or premium to net asset value. Also for UK investors they do not incur stamp duty, which Investment Trusts do.

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Re: ETF protection / ring fencing / etc

#441885

Postby Lootman » September 13th, 2021, 2:26 pm

scrumpyjack wrote:An ETF is a wrapper, ie a structure for an investment fund. It does not necessarily have to be an index tracker although most are. Vanguard also run some actively managed ETFs.

The very popular ARK series of active funds are structured as ETFs.

In a sense active ETFs still track an "index". It is just that that index is an ever-changing selection and allocation of shares, rather than something that is only changed quarterly.

scrumpyjack wrote:The advantages of the ETF structure are generally lower fees and no discount or premium to net asset value. Also for UK investors they do not incur stamp duty, which Investment Trusts do.

ETFs also have the advantage that, unlike open-ended funds, they trade real-time and intra-day, just like shares. This means that you can short them, day-trade them, buy or sell options on them, lend them, and so on.

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Re: ETF protection / ring fencing / etc

#441898

Postby mc2fool » September 13th, 2021, 2:55 pm

scrumpyjack wrote:The advantages of the ETF structure are ... no discount or premium to net asset value.

No, that's not so. As ETFs are traded on the secondary market, they do sometimes trade at discounts/premiums to NAV, although those are usually small and usually quickly corrected (arbitraged away). But not always....

See https://www.etf.com/etf-education-center/etf-basics/understanding-premiums-and-discounts

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Re: ETF protection / ring fencing / etc

#441984

Postby tjh290633 » September 13th, 2021, 8:31 pm

Lootman wrote:
tjh290633 wrote:The current obsession with ETFs amazes me. I cannot see the attraction.

Since I happen to know you keep detailed records of your portfolio history, I would invite you to look at them in comparison to an appropriate index over the same time period. Even if you have out-performed that index, and I am willing to believe that you have, such an exercise will enable you to see how much of your returns were from beta (the move in the equivalent index) and how much was alpha (the extra return you created over that index).

I would guess that your beta number is higher than your alpha number. That beta number is what you would have returned if you had instead simply bought an ETF at the beginning (they did not exist back then but you know what I am saying). That market return would have been yours with no effort or time expended over the decades rather than the hundreds (thousands?) of hours you personally invested in learning about investing and managing your portfolio.

Now if like me you enjoy this stuff then maybe that doesn't matter. But for many it would matter as they would rather do something else with their time. And almost by definition most individual investors will not out-perform the index as you have done.

The easiest way to demonstrate that is to take my income unit data and compare it with that for the FTSE100 over the whole period.

Date         Unit value   FTSE (UKX)  Acc Unit
21-Apr-87 1.00 1,949.40 1.00
13-Sep-21 -6.39 -7,068.43 -31.24

IRR 5.54% 3.81% 10.52%

This is purely on capital, taking no account of income generated, so I have outperformed the index which I follow by 1.73% over the 34 years. There is no comparable data for the TR version of the UKX, but for my accumulation unit the IRR is 10.52%, showing that reinvested income contributes almost exactly 5% to the return. In actual fact, for the portfolio over the years, the IRR is 9.61% which reflects the building of the portfolio and withdrawal of income from time to time.

How much time have I spent? Difficult to say, as much of it will have been spent keeping records and very little actually managing the portfolio. Without the internet in the early days, there will have been a daily task of collecting price data from Teletext/Ceefax or the daily papers. Trading was done by phone in those days, but infrequently. 4 trades in year 1, 6 in year 2, 10 in year 10, to 27 in 2020-21.

I have enjoyed it, and I think that the reward has justified the activity.

TJH

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Re: ETF protection / ring fencing / etc

#442019

Postby JohnW » September 14th, 2021, 12:17 am

I don't know the answers to a lot of your thoughtful questions, so just a couple of observations.
Your money is probably held by a custodian rather than the fund managers/business. If you chose two ETF providers, you'd probably hope they didn't use the same custodian in case someone goes rogue there.
Not to belittle your concerns, but more commonly you might find a computer glitch in one business cuts you off from access to your assets for a while. Safety in numbers, at least the number '2'.
Of course, others have agonised over this before: https://www.bogleheads.org/forum/viewtopic.php?t=182210
Lootman wrote:As the word "passive" implies, an ETF manager does not do very much since, like other index funds, trackers mostly self-manage.

Well, if you want a different view, listen to the fellows running Vanguard's passive mega-fund and see them turning themselves into knots ensuring the fund doesn't deviate from the index at the end of each DAY. https://www.bogleheads.org/blog/2021/09 ... ick-ferri/ Here's some of the transcript: And so you know that sounds pretty easy, but there’s a lot of moving parts in there. So there’s cash flow like I mentioned, there’s – we work with a data team that gets in here at seven o’clock in the morning to make sure that the data, the indexes that we’re actually looking at, that all of the corporate actions that might have happened the previous night, that they’re all accounted for, so that when I get in, that I make sure that the index I’m tracking is the exact index and we’re talking like a spot on, like no discrepancies whatsoever. Then throughout the course of the day you have all these different index changes, right, that we get notified that are going to be effective at the end of the day and so we need to position the portfolio so that at four o’clock our fund replicates the index spot on, and so any index changes we need to factor that in, and usually that’s going to mean that I need to buy, so I’m going to have to sell something to fund that buy. And so multiple, I mean we could have a dozen of those that happen on any given day, and it could be syndicate offerings, it could be Dutch auctions, it could be numerous different corporate actions that you need to incorporate into it.

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Re: ETF protection / ring fencing / etc

#442063

Postby murraypaul » September 14th, 2021, 10:03 am

mc2fool wrote:Ok, thanks, that's interesting. I wonder what happened to iShares II to VI? :D


I think they are all in use, iShares have a lot of ETFs!

If you really want to dig into the details, the issuing company details can be found here:
https://www.ishares.com/uk/individual/e ... pectus.pdf
https://www.ishares.com/uk/individual/e ... pectus.pdf
https://www.ishares.com/uk/individual/e ... pectus.pdf
...

Which also shows which ETFs are part of which issuing company.

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Re: ETF protection / ring fencing / etc

#442110

Postby hiriskpaul » September 14th, 2021, 12:07 pm

tjh290633 wrote:The problem with passive investing is that you are passive. You are carried along on whatever the manager of your particular fund does. He may be an automaton, blindly following the market, he may be trying to better the market, or he may just be trying to feather his own nest. You have no control. Somewhat better with an IT, where at least shareholders have a vote.

The current obsession with ETFs amazes me. I cannot see the attraction.

TJH

The attractions of ETFs are mainly the low costs, tax efficiency and high liquidity.

For passive index tracking investing, available but not exclusive to ETFs, the attraction is the elimination of the risk of significantly underperforming the index. Something that frequently happens with active management.

Back on topic, fraud is a possibility, but there may be a risk of other operational failures. Faulty software and reconciliation systems that don't count all the beans properly, or a cyber attack. Even if you don't lose money, operational failures may tie up your money for a prolonged period. So yes, it is not unreasonable to spread the risk around multiple ETF providers. Or even across ETFs and conventional open ended tracker funds. 2 providers is probably enough diversification as the chance of failure is so remote anyway.

With active management there is more opportunity for fraud as active management is less transparent than passive index tracking and there is less motive for fraud in index tracking (no poor performance to hide, etc.). I have never heard of fraud taking place in a passive index fund, but would not rule out the possibility of it happening.

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Re: ETF protection / ring fencing / etc

#442116

Postby Hariseldon58 » September 14th, 2021, 12:21 pm

Worth bearing in mind that the creation process for an ETF basket is by its very nature a very transparent process.

Overall it’s worth having multiple providers, fund structures, brokers adding to wide diversity in the actual portfolio and types of assets held, to minimise potential catastrophes. Once you have reached a reasonable level of diversification than I’d consider problem addressed.


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