Investing - Theory, News & General • Brokerage / ETF / custodian risks when you hold a single ETF

Hi everyone! I'm trying to wrap my head around what are the intrinsic risks of owning a single ETF (VT).

For my situation:

• I would hold VT in individual brokerage accounts at Schwab and IBKR (initially had only the IBKR account, then had the Schwab account opened through my employer).
• The VT fund is managed by Vanguard Equity Index Group.
• The VT fund assets are held by State Street Bank and Trust as the custodian.
• The fund has an indepent accounting firm, Pricewaterhouse Coopers LLP.

I'd like to "insure" myself in a way that not more than ~50% of my assets would be wiped out in case of a catastrophic failure for one of the involved parties (Schwab, IBKR, Vanguard, State Street).

I'm not concerned about brokerage failures, since I already have my assets split between Schwab and IBKR.

I could also split my equity investments into VTI and IXUS (so there would be 2 separate fund managers, and 2 separate custodians), which would provide redundancy across all levels. But holding just VT is simpler, and I'd prefer this option if it doesn't introduce additional risk. I'm fine as long as there is no single point of failure (i.e., are the assets recoverable, even if you "delete" any one company?).

From skimming the VT prospectus, IIUC, there are mainly the following risks:

1. The ETF is delisted from all stock exchanges and cannot be traded anymore. I don't understand why would this ever happen? But I guess it doesn't matter, since I'd buy and hold for the long-term, and I guess at some point, it has to be listed somewhere again, since they can't just keep all the fund assets blocked forever?
2. Vanguard goes bankrupt. IIUC, The VT fund can just choose a new fund manager, and everything continues as if nothing happened, OR it can choose to liquidate, in which case it pays out all the cash to clients at NAV. In case of liquidation, how long would it take for the cash to be deposited in client accounts after the fund liquidation? If it takes a long time, it could lead to significant losses by not being invested in the market (e.g., if the liquidation happens at the bottom of a market downturn, right before the market starts recovering).
3. State Street suffers a cyber attack that wipes out the VT holdings' ownership data. Does Vanguard hold a replica of the holdings' ownership that could be used to restore State Street's data, or could they just choose a new custodian and continue as if nothing happened? Or if the custodian's book-keeping blows up, VT's holdings are lost forever, and NAV essentially goes to 0?
4. Vanguard suffers a cyber attack just as above, same risk and same question (but I guess that in this case, rather than NAV going to 0, it's a problem of not knowing who owns how much of the fund assets).

I didn't list fraud as a risk, because I guess it's very unlikely that Vanguard, State Street, and Pricewaterhouse Coopers would all partake in fraud / be an accomplice at the same time.

Did I understand how things work and the risks correctly? What happens in each of the 1, 2, 3, 4 scenarios? Is there sufficient redundancy to make VT resilient to any single-point failure?

Note: I already read the Vanguard safety article on the wiki and JL Collin's article on Vanguard getting nuked, but they mostly address bankruptcy risk, or assume that complete data loss for any one party is unlikely thanks to the business continuity plans (which may or may not be well-implemented - big names have been affected by cyber crime in the past).

Thanks!

Statistics: Posted by swiss_pokemon — Sun Jun 16, 2024 6:33 pm — Replies 0 — Views 83

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