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This is tangential to RH, but never the less related issue: For many years now I was wondering how exectly the ETF work and whether when I buy an ETF I can be 1

This is tangential to RH, but never the less related issue: For many years now I was wondering how exectly the ETF work and whether when I buy an ETF I can be 100% sure the issuer can follow through on their obligations? What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent? I found it difficult to understand the intricacies related to this question. Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price... What mechanism are there in place to insure that ETF will not deviate from the underlying stock?

birdsbirdsbirds 6y ago
They are liquidated once the deviation is too big.
maest 6y ago
Each ETF share is backed by a unit of the underlying, so there's no price risk for the ETF issuer.
- birdsbirdsbirds 6y ago
  There are two kinds of ETF. Only one of them is operated like that. Check the fine print to be sure.
toast0 6y ago
An investment in an ETF or other mutual fund is putting your money in the hands of the managers of the fund. They set out objectives for the fund, but they don't necessarily have an obligation to meet those objectives or to keep the same objectives. They can change the objectives within the processes required by the bylaws of the fund. Most of the objectives will have weasel words for management discretion in case of volatile markets. They have quarterly reporting obligations, and you can review those reports to see how they're doing. If you don't like what you see, you can sell the funds and/or file a shareholders' lawsuit and/or file a SEC complaint. If you don't like that, the good news is with zero comissions as the norm, and fractional shares at many brokerages, you could build up your portfolio to match an index of your choice, without significant monetary transaction costs. It would take a lot of time to setup and when you made contributions, and dividend processing effort could be significant.

birdsbirdsbirds 6y ago

They are liquidated once the deviation is too big.

maest 6y ago

Each ETF share is backed by a unit of the underlying, so there's no price risk for the ETF issuer.

birdsbirdsbirds 6y ago
There are two kinds of ETF. Only one of them is operated like that. Check the fine print to be sure.

toast0 6y ago

An investment in an ETF or other mutual fund is putting your money in the hands of the managers of the fund. They set out objectives for the fund, but they don't necessarily have an obligation to meet those objectives or to keep the same objectives. They can change the objectives within the processes required by the bylaws of the fund. Most of the objectives will have weasel words for management discretion in case of volatile markets. They have quarterly reporting obligations, and you can review those reports to see how they're doing. If you don't like what you see, you can sell the funds and/or file a shareholders' lawsuit and/or file a SEC complaint. If you don't like that, the good news is with zero comissions as the norm, and fractional shares at many brokerages, you could build up your portfolio to match an index of your choice, without significant monetary transaction costs. It would take a lot of time to setup and when you made contributions, and dividend processing effort could be significant.