It begs the question, though: could it happen here? Unlikely, says one industry observer, because of diversification requirements put in place by the Securities and Exchange Commission (SEC).
If it was going to happen here, the observer said, it would have happened already.
Gary Gordon for ETF Expert tells us that, in his opinion, ETFs wouldn’t be prone to this kind of disruption. “The issue comes back to what risks exist in any investment.” ETFs do have some credit risk, he says. If you have an ETF that has invested in a company that goes under (think Lehman or IndyMac), this may affect the ETF’s ability to pay out some of its affected dividends.
“But essentially, credit risk is diversified across a fund’s [ETF] investments,” he says.
Exchange traded notes (ETNs), which do carry credit risk, can be affected by the collapse of these financial insitutions, however. As debt instruments, the investor is taking on the credit of the issuer. If the issuer goes under, as Lehman did, there’s little recourse.