Why you don’t care about the bankruptcy of a provider

Contrary to what many people think, safe products can also be found on the stock exchange. Anyone who invests their money in ETFs has even more protection than with some life and pension insurances.

in the previous post in our ETF column we explained what ETFs are in youngest sheds light on why ETFs are so amazingly attractive to private individuals. Today we’re going to take a closer look at the legal structure of an ETF. This is important if you want to understand why ETFs are not only very simple, but also very safe investment products.

First of all, the concept of the “special fund” is of great importance. Some of you will have heard the term in connection with mutual funds. ETFs are a special type of mutual fund.

Special assets – what does that mean?

In the case of investment funds, the investor money forms a kind of trust assets from the perspective of the fund company. The investor assets managed by a fund in an ETF are legally separated from the assets of the managing fund company, the ETF provider – also from the assets of the other funds that the fund company also manages, hence the designation “special assets”.

The fund company is therefore not the owner of the investor money, but only its administrator or trustee. This very important regulation is based on uniform and strict legal provisions that apply in all EU countries and in Switzerland to investment funds that are sold to consumers.

The “ETF Pope”
Dr. Gerd Kommer has been a best-selling investment guide book author for more than 20 years. At the same time he is the managing director of Gerd Kommer GmbH, a digital asset management system where customers can start with small amounts as well as the Gerd Kommer Invest GmbH, a fee consulting company. In his t-online column, he and his colleagues Felix GroƟmann and Daniel Kanzler write every two weeks about his specialty: long-term wealth accumulation with ETFs.

Fund assets are kept separately

If the managing fund company gets into economic difficulties and creditors have access to their assets, this is irrelevant for the asset position of the investors in the individual funds that this fund company manages.

Special assets and the assets of the fund company are also separated by the fact that the fund assets – i.e. the securities in which the fund invests – are kept in a separate custodian bank. This custodian bank is not to be confused with the investor’s custodian bank.

Bankruptcy doesn’t matter to investors

The custodian bank of the fund company is in turn subject to the respective national banking supervision. Both the bankruptcy of the fund company and that of its custodian bank would be irrelevant from the investor’s point of view, because both institutions only act as administrators or custodians for the investor.

The special fund structure is not a German or European invention, as some believe, but an American one. It is over 90 years old, has been continuously updated over these nine decades, and is the global norm in mutual funds for retail investors.

Your own custodian bank is also only the custodian

Just as important: a bankruptcy of your own custodian bank – i.e. the bank with which you as a private investor hold your ETF shares – would be insignificant for you, since your fund shares in a securities account are in turn not owned by the bank, but only kept by it.

This structure has been around for more than 90 years. Since then, it has been continuously improved in terms of regulatory law and has since proven itself through a barely countable sequence of international and national political and economic crises.

ETFs have passed crises with flying colors

Just remember the most recent market crises, the dot-com crash at the turn of the millennium, the global financial crisis from 2008 and the corona crisis. These three “stress tests” could hardly have been tougher. ETFs as a legal structure passed all three with flying colors. Even the collapse of individual banks or fund companies could not affect the legal structure of “special assets plus depositary status”.

Investment funds, including ETFs, are likely to be among the most strictly regulated investment products of all – in a positive sense: savers to whom legal security and tight government supervision mean a lot cannot really get more security and transparency into their custody accounts with any other investment product.

For comparison: the level of investor protection is significantly lower in the case of capital-forming life insurance, private pension insurance, certificates, open real estate funds or Bitcoin investments.

In the next post in 14 days, we will show that ETFs are not as new as many private investors believe.


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