What happens if Vanguard goes belly up? Is it better to hold ETF's that replicate a vanguard fund, or the vanguard fund itself from a diversification perspective
A friend lost a life savings by holding Lehman Brothers Treasury mini bonds ...about 5 years ago today he went from being multi-millionare to flat broke.
That's why it can be important to know what you are actually investing in. The Vanguard funds or their ETF equivalent are simply containers for shares of stocks or bonds from a wide range of sources, which are held by a third party like Mellon Bank. Vanguard the company is actually owned by it's various funds, sort of an upside-down relationship compared to most mutual fund and ETF marketing companies. It's not particularly likely to go away.
If it were dissolved, though, all the shares of stock and all the bonds held by the funds are entrusted to a third party which could make investors whole. These get audited, so folks can't play funny games. That's where the SIPC coverage comes in, to restore funds in the event of some sort of internal fraud were some shares or bonds 'disappear'.
Those Lehman Brothers Minibonds, though... They were 'structured financial notes' issued in Hong Kong and Singapore backed by the full faith and credit of... Lehman Brothers. These instruments used underlying securities issued by Lehman Brothers wrapped around a collateral debt obligation (CDO) hidden beneath issued by Beryl Finance Limited, an entity created and controlled by Lehman Brothers, built on notes from Lehman US Dollar Liquidity Fund. And then it gets
complicated....
The thing is, there's nothing there when Lehman Brothers is removed from the picture. You get a bunch of offsetting instruments, all now valued at nothing. There aren't any shares of real companies, or bonds representing real loans to other companies.
