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Comment by Archelaos | Hacker News Reader

A warning about index funds, that were mentioned a couple of times in different threads here.

If the investemnt bank issuing the index fund goes bankrupt, you lose your money - see Lehman Brothers.

You can mitigate the risk by buying from different issuers. However, the bankruptcy risks might still be too closely related; in other words: there is the risk of a domino effect of bankruptcies of investment banks in a future financial crisis.

The best thing you can do to avoid this risk is to buy many different stocks and directly mimic an index or other fund yourself. It is not necessary to do this exactly. A random proportional selection of a considerable number of stocks (40+, but the more the better) from the index or fund you want to mimic and adjusting your investment once a year should be sufficient.

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Banks generally do not issue index funds / ETFs. They're often the APs, but that poses very little risk to the funds. I cannot recall the last time I saw an ETF that was issued by a bank.

CORRECTION: As others have pointed out, many ETFs secure the investment with a custodian. This makes these ETFs immune to a sole bankrupcy of the issuer. In case of a domino effect or a close interwovenness between issuer and custodian this might turn out problematic nevertheless. But there are many kinds of ETFs, most notably swap-ETFs, that are not backed by real stocks. For these, what I have written applies without restriction.

I have never heard this, is it really true? Most people have their 401k's/ira's in index/mutual funds so it would be pretty devastating if like vanguard or fidelity went under and everyone lost their money... to the point where I don't think the government would allow it to happen, but maybe that's just wishful thinking?

I took a look at a random prospectus to see what was disclosed (For ITOT). It does have some risk that sort of sound like this:

> Authorized Participant Concentration Risk...To the extent that Authorized Participants exit the business or are unable to proceed with creation or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem, Fund shares may be more likely to trade at a premium or discount to Net asset value and possibly face trading halts or delisting.

> If the investemnt bank issuing the index fund goes bankrupt, you lose your money - see Lehman Brothers.

The actual assets are held by a separate custodian.

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