# Is there risk in not diversifying my diversification? (All eggs in one ETF basket)



## PennyWise.... (Aug 24, 2013)

Last month I started this thread and, believe it or not, was introduced to the concept of ETFs for the first time. And I'm comfortable at this point trying out a couch potato-esque strategy utilizing them.

My question now: even though ETFs are, by their nature, diversified... is there risk in buying, for example, 5 Vanguard ETFs as opposed to 5 ETFs from different companies? I guess what I'm asking is what happens if "Vanguard" collapses, goes under, is found in some scandal, etc?


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## OptsyEagle (Nov 29, 2009)

PennyWise.... said:


> My question now: even though ETFs are, by their nature, diversified... is there risk in buying, for example, 5 Vanguard ETFs as opposed to 5 ETFs from different companies? I guess what I'm asking is what happens if "Vanguard" collapses, goes under, is found in some scandal, etc?


Someone else would buy the business of managing your money, out of the bankruptcy proceedings, and you would not be out a single nickel. Vanguard cannot borrow against your assets and therefore their bankruptcy would be meaningless. Perhaps a short term delay, but I doubt even that.

Now I suppose this doesn't eliminate someone at Vanguard deciding to steel some money but since there is a trustee involved and the valuations of the funds are compared to the valuation of an index, each day (and each minute internally), I suspect they would look elsewhere for their ill gotten gains. One of Vanguards US mutual funds would be a better target, in my opinion.


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## PennyWise.... (Aug 24, 2013)

Thanks.



OptsyEagle said:


> One of Vanguards US mutual funds would be a better target, in my opinion.


A better target for someone at Vanguard deciding to steal money? Or a better target for my investment choice? Or?


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## Just a Guy (Mar 27, 2012)

There are risks with everything if you look hard enough...if you get up in the morning, you could die in a tragic accident, same if you stay in bed...the good news is, if something happens, you won't need to worry about something happening to your vanguard investments anymore.

I suppose there is a risk that vanguard may only tell you that they've purchased the holding on your behalf, when in reality they never did...this actually happens with some small Ponzi schemes all the time, but vanguard is a big company which is monitored by regulators. True, as seen with worldcom, Enron, etc. that doesn't always mean much but, if you're ever going to start investing, you're going to have to take some risk.

This is why people must be evaluated for their "risk tolerance". So far, yours seem very low.


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## CalgaryPotato (Mar 7, 2015)

Just a Guy said:


> This is why people must be evaluated for their "risk tolerance". So far, yours seem very low.


You have to remember there are different types of risks. If you buy a broad selection of ETF's covering the world, your risk of losing some money is high but your risk of losing everything should be virtually 0, unless something catastrophic happens that devalues every major company in the world to nothing. But if there is an underlying risk to owning an ETF, something along the lines of Vanguard ( a single company) losing all of it's value, making your whole portfolio worthless then that is something you'd have to be wary of.


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## OnlyMyOpinion (Sep 1, 2013)

See also this recent thread: http://canadianmoneyforum.com/showthread.php/39625-Understanding-ETF-risk-all-eggs-in-too-few-baskets?p=616497&highlight=broker+risk#post616497


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## OptsyEagle (Nov 29, 2009)

PennyWise.... said:


> Thanks.
> 
> 
> 
> A better target for someone at Vanguard deciding to steal money? Or a better target for my investment choice? Or?


A better target to steel money. You can't buy a Vanguard US mutual fund, assuming you are a Canadian resident.


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## PennyWise.... (Aug 24, 2013)

Just a Guy said:


> This is why people must be evaluated for their "risk tolerance". So far, yours seem very low.


Hardly. My risk tolerance is actually pretty high. I took a 98% bath on a stock because I believed the company would win the day (it didn't). ETFs are entirely new to me. My asking a question does not, in any way really, indicate anything other than I'm seeking information. Taking risks and being stupid aren't the same thing. (neither is being ignorant and being stupid... I admit to being the former).


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## GreatLaker (Mar 23, 2014)

Here is a good article from a Canadian source addressing the possibility and impact of an ETF provider going bankrupt. It corroborates what other posters here have said. The possibility is low and the investors assets are held in trust, separate from the assets of the ETF provider and not subject to creditor claims in the event of insolvency.
http://www.everythingzoomer.com/qa-etf-bankruptcy/#.VRVsXaxTGUl

But never say never, lots of crazy things have happened in the financial and investing world.

I have ETFs from 3 different providers and GICs from 5 different banks (all through one discount broker), not for better security but because I felt they were the best choices at the time, and ETFs from different providers use slightly different indexes. One tactic I use is to hold different ETFs in different accounts. For example for Cdn equities I hold HXT (TSX60) for its tax advantages in my non-registered account and VCE (TSX Composite) in my RRSP and TFSA. For US equity I hold VUN (US total market) in my non-registered account and XUS (S&P 500) in my RRSP. I would not hold 2 different ETFs tracking the same market in one account (for example VUN and XUS in my RRSP) because it adds complexity.

A bigger risk for many investors is making mistakes, like buying high to get in on a hot stock or segment, selling low to get out of a bad buy, trying to time the market selling because they think it has peaked, sitting on cash that is devalued by inflation etc. I found The Four Pillars of Investing by William Bernstein to be a fantastic book that really changed my outlook on investing and risk.

I buy what I feel are the best investments for me, and if I get a little lower risk that's a bonus. A simple 3 or 4 ETF portfolio from any of the major ETF providers will outperform many if not most investors.


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## Guban (Jul 5, 2011)

GreatLaker said:


> I have ETFs from 3 different providers and GICs from 5 different banks (all through one discount broker), not for better security but because I felt they were the best choices at the time, and ETFs from different providers use slightly different indexes. One tactic I use is to hold different ETFs in different accounts. For example for Cdn equities I hold HXT (TSX60) for its tax advantages in my non-registered account and VCE (TSX Composite) in my RRSP and TFSA. For US equity I hold VUN (US total market) in my non-registered account and XUS (S&P 500) in my RRSP. I would not hold 2 different ETFs tracking the same market in one account (for example VUN and XUS in my RRSP) because it adds complexity.


Why do you have XUS in your RRSP, and VUN inside? If they were reversed, holding VUN allows you to save the US withholding tax, would it not?


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## OptsyEagle (Nov 29, 2009)

PennyWise.... said:


> (neither is being ignorant and being stupid... I admit to being the former).


The stupid thing would have been not to ask the question you did.


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## GreatLaker (Mar 23, 2014)

Guban said:


> Why do you have XUS in your RRSP, and VUN inside? If they were reversed, holding VUN allows you to save the US withholding tax, would it not?


Hi Guban, VUN and XUS are both Canadian wraps of US domiciled funds; both are subject to US FWT.

To avoid the FWT I would have to hold VTI or IVV in US$. Trying Norbit's Gambert to convert C$ to US$ was not something I wanted to do when I set up my account. I am considering it for the future, but with 15% FWT on ~3% dividends, and say 10% of my total holdings in US$ in my RRSP that works out to 0.045% of total assets, or $45 per year per $100 k. Is it worth it?


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