What happens if index fund closes?
The managers will sell all holdings in the fund, settle other obligations and divvy up the balance among remaining shareholders. The price per share from liquidation could differ from the fund's last trading price, so be aware of this risk.
This would entail all stocks in an index effectively going to a price of zero. Even if the companies that issued the stocks all went bankrupt simultaneously, investors would likely recover some money based on the book value of the firm as it sells off assets in liquidation.
A closed fund may stop new investment either temporarily or permanently. Closed funds may allow no new investments or they may be closed only to new investors, allowing current investors to continue to buy more shares. Some funds may provide notice that they are liquidating or merging.
A stock price of zero, however, means that the expectation of future earnings is irrevocably lost, as would be the case for a company that dissolves and ceases to do business. In order for an entire stock market to go to zero, the same would need to be true for all companies in the stock market.
Can an S&P 500 index fund investor lose all their money? Anything is possible, of course, but it's highly unlikely. For an S&P 500 investor to lose all of their money, every stock in the 500 company index would have to crash to zero.
An index fund usually owns at least dozens of securities and may own potentially hundreds of them, meaning that it's highly diversified. In the case of a stock index fund, for example, every stock would have to go to zero for the index fund, and thus the investor, to lose everything.
All investments carry risk. An index fund, like anything else, can potentially lose value over time. That being said, most mainstream index funds are generally considered a conservative way to invest in equities (although there are lesser-known index funds that are thought to carry greater risk).
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
In the unlikely event that we become insolvent, your money and investments would be returned to you as quickly as possible, or transferred to another provider. This is because your money and investments are held separately from our own.
How risky are closed-end funds?
Equity Securities Risk: Closed-end funds that invest in common stock and other equity securities are subject to market risk. Those equity securities can and will fluctuate in value for many different reasons.
A term fund has a specified termination date at which time the fund's portfolio is liquidated. Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time.
The important thing to remember about index funds is that they should be long-term holds. This means that a short-term recession should not affect your investments.
Index funds are generally considered safe because they don't rely too much on the performance of any individual stock, and they also don't rely on the competence of investment managers as actively managed mutual funds or hedge funds do.
In 2002, the fallout from frenzied investments in internet technology companies and the subsequent implosion of the dot-com bubble caused the S&P 500 to drop 23.4%. And in 2008, the collapse of the U.S. housing market and the subsequent global financial crisis caused the S&P 500 to fall 38.5%.
Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
That's because your investment gives you access to the broad stock market. Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing.
Indexes are set portfolios. If an investor buys an index fund, they have no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy.
If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.
Should I put all my money in S&P 500?
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
As a result, the broad-market index has an excellent historical track record of generating wealth. Over its history, the S&P 500 has generated an average annual return of 9%, including re-invested dividends. At that rate, even a middle-class income is enough to become a millionaire over time.
Fund | 2023 performance (%) | 3yr performance (%) |
---|---|---|
MS INVF US Insight | 52.26 | -47.18 |
Sands Capital US Select Growth Fund | 51.3 | -20.88 |
Natixis Loomis Sayles US Growth Equity | 49.56 | 26.07 |
T. Rowe Price US Blue Chip Equity | 49.54 | 5.81 |
The addition of too many funds simply creates an expensive index fund. This notion is based on the fact that having too many funds negates the impact that any single fund can have on performance, while the expense ratios of multiple funds generally add up to a number that is greater than average.
Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day. Even if none of these potential disasters occur, 3x ETFs have high fees that add up to significant losses in the long run.