can an etf go to zero

Despite ETFs' low-risk reputation, it's possible for them to decline to zero due to underlying asset failures, capital outflows, or inverse ETF mechanics.

Oct 13, 2024 at 12:05 am

Can an ETF Go to Zero?

Yes, it is possible for an ETF to go to zero.

ETFs are investment funds that track the performance of a basket of securities, such as stocks, bonds, or commodities. While ETFs are generally considered to be less risky than individual securities, they are still subject to the risks of the underlying assets.

How Can an ETF Go to Zero?

There are several ways that an ETF can go to zero:

Underlying assets go to zero. If the value of the underlying assets in the ETF's portfolio falls to zero, the ETF will also go to zero. This can happen in the event of a market crash or a bankruptcy of the issuer of the underlying securities.
Outflows of capital. If investors sell their shares of an ETF faster than new investors buy shares, the ETF's share price can decline rapidly. This can lead to a "death spiral," where the ETF's share price falls as more and more investors sell their shares.
Inverse ETFs. Inverse ETFs are designed to move in the opposite direction of their underlying index. If the underlying index goes up, the inverse ETF will go down. This means that inverse ETFs can go to zero if the underlying index rises significantly.

Examples of ETFs That Have Gone to Zero

There have been a number of ETFs that have gone to zero in recent years, including:

VelocityShares Daily Inverse VIX Short-Term ETN (XIV)
VelocityShares Daily Inverse Crude Oil ETN (OIL)
MicroSectors Gold Miners ETN (GDXJ)

How to Avoid ETFs That Could Go to Zero

Investors can avoid ETFs that are at risk of going to zero by doing the following:

Research the underlying assets. Before investing in an ETF, investors should research the underlying assets and their risk factors.
Check the ETF's track record. Investors should look for ETFs with a long track record and a stable share price.
Be aware of the risks. Investors should be aware of the risks associated with ETFs, including the risk of losing their entire investment.

Conclusion

While it is possible for an ETF to go to zero, investors can reduce their risk by doing their research and investing in ETFs with a strong track record.

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