What happens to VTI if vanguard closes?

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masonstone
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What happens to VTI if vanguard closes?

Post by masonstone »

What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
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Re: What happens to VTI if vanguard closes?

Post by livesoft »

:) It gets a new ticker symbol. Either ITOT or perhaps SPTM.
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sycamore
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Re: What happens to VTI if vanguard closes?

Post by sycamore »

Hmm... is this scenario covered by the prospectus? :)
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Watty
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Re: What happens to VTI if vanguard closes?

Post by Watty »

Before I started using index funds I had a small mutual fund that closed.

The way it worked was that it was merged with another mutual fund so that it was not a taxable event(as I recall). Basically every share was exchanged for something like 1.2345 shares of the other mutual fund so that your investment was still worth the same amount.

You can put this at the very bottom of your list of things to worry about. It is not going to happen and if it did it would not be a problem.
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Re: What happens to VTI if vanguard closes?

Post by tonyclifton »

Wouldn’t a more likely scenario be that they raise the fees to make it “profitable” to manage the fund?
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

You have 3 separate corporations.

1. VTI, a zero employee corporation which is owned by the shareholders. As a zero employee company it subcontracts its business functions.
2. Vanguard Portfolio Management, which does the portfolio management, trading, etc.
3. Vanguard Group, which is the fund sponsor are does the operations stuff.

So, what aspect of Vanguard are we talking about?

VTI is a separate corporation. Its value is dependent on its assets which are held is a separate segregated account. The chance of VTI going bankrupt are very very low.

VTI has a independent board of directors. In theory they could fire Vanguard and hire different subcontractors. This really does not happen.

More likely would be another fund sponsor would pay Vanguard to take over VTI. Or take over Vanguard entirely.
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Re: What happens to VTI if vanguard closes?

Post by EagleI »

If Vanguard, with over $7 trillion under management went bankrupt, I think we would have more to worry about than VTI.
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Pete12
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Re: What happens to VTI if vanguard closes?

Post by Pete12 »

masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
I thought the actual underlying shares of Vanguard's fund were held at JP Morgan. So if something happened to Vanguard the assets would not be affected?
400401402
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Re: What happens to VTI if vanguard closes?

Post by 400401402 »

VTI is a separate entity (Investment Company to be precise) organized as per the Investment Companies Act of 1940.

Vanguard acts as the Investment Advisor to this Investment Company called "VTI". Sure Vanguard may have seeded the original capital when VTI was originally founded, but their role is one of a fiduciary (Investment adviser) to VTI.

If one holds VTI, they are shareholders of the Investment Company VTI. Shareholders own VTI and are represented by the board of the Investment Company.

If vanguard closes (assuming the OP meant that the investment adviser closes), VTI, the investment company has few options:
1. Find another Investment adviser/fiduciary.
2. Merge with another investment company that already has an investment adviser (E.g ITOT)
3. De-incorporate the investment company and return the capital to shareholders
Last edited by 400401402 on Fri Jan 14, 2022 10:33 am, edited 1 time in total.
100factorial
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Re: What happens to VTI if vanguard closes?

Post by 100factorial »

masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
A hypothetical guess ... Forty act funds (mutual funds and ETFs) would be left unscathed and new fund managers would be hired by the boards. Retail brokerage accounts could in theory become insolvent in a hypothetical scenario in which the retail brokerage division of V were to become severely impacted.
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

Pete12 wrote: Fri Jan 14, 2022 10:25 am
masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
I thought the actual underlying shares of Vanguard's fund were held at JP Morgan. So if something happened to Vanguard the assets would not be affected?
A fund's asset must be held in a segregated account at a independent custodian.

It is held in a segregated account so it can't be co-mingled with any other assets from any other company. So, in theory, no matter who goes bankrupt the assets will remain the sole property of VTI and be unaffected.

It is held at a independent custodian as a independent control. The auditors can go to this independent agent to confirm that the assets Vanguard says VTI holds VTI actually holds.
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alex_686
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

100factorial wrote: Fri Jan 14, 2022 10:33 am
masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
A hypothetical guess ... Forty act funds (mutual funds and ETFs) would be left unscathed and new fund managers would be hired by the boards. Retail brokerage accounts could in theory become insolvent in a hypothetical scenario in which the retail brokerage division of V were to become severely impacted.
I have had ringside seats to a couple of brokerage bankruptcies.

With the exception of the clients on margin, retail client's assets are held in a segregated account and thus would be unaffected.

Most brokers are covered both by SPIC and independent insurance, so that covers most margin clients.

Regardless, client's with co-mingled assets with the brokerage have those assets over collateralized.
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Re: What happens to VTI if vanguard closes?

Post by nisiprius »

Remember, this is not a case where you pay money up front for a promise to do something for you in the future.

When you buy shares of VTI, the "authorized participants" buy actual shares of stock in all of the stocks VTI holds. And their profit depends on doing this quickly. The shares exist.

Furthermore, Vanguard doesn't hold them, making it difficult for Vanguard to engage in shenanigans, like pretending to buy the stock and not really doing it.

Vanguard.com >> "personal" >> search >> VTI >> Vanguard Total Stock Market ETF (VTI)
>> view prospectus and reports >> Statement of Additional Information (SAI)
p. B-2
Custodians. JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179 (for the Extended Market Index, Mid- Cap Index, Mid-Cap Growth Index, Mid-Cap Value Index, Small-Cap Index, Small-Cap Growth Index, Small-Cap Value Index, and Total Stock Market Index Funds)...
You're the "beneficial owner," the benefits of owning those shares are yours, and the actual owner isn't Vanguard, it's JPMorgan Chase.

Small ETFs fold all the time. The shares of stock still exist. A couple of things can happen. For a small ETF it may simply be "liquidated." One moment you are the proud owner of 100 shares of the VanEck Vectors Coal ETF and the next moment those shares are gone and you have money in your account, just as if you'd sold the ETF yourself, probably not at the time you'd have liked.

For an unbelievably gigantic ETF like VTI, lifesoft's guess is that somehow some other company would acquire it. The point is, Vanguard isn't holding the stocks in VTI, a custodian bank is; you are the "beneficial owner;" it's possible that there could be some delays in getting everything squared away, but with something as gigantic as VTI my guess is that there would be plenty of oversight from the SEC and others to make it fairly smooth.

The shares of stock in VTI exist. They are yours. And Vanguard isn't the company taking care of them.
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Re: What happens to VTI if vanguard closes?

Post by nisiprius »

Alex_686 (or anyone who might know), what's your guess on the effective time lag between someone buying shares of VTI and the authorized participants literally buying the underlying shares of the stocks in VTI?
Last edited by nisiprius on Fri Jan 14, 2022 10:56 am, edited 4 times in total.
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UpperNwGuy
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Re: What happens to VTI if vanguard closes?

Post by UpperNwGuy »

It makes no sense to use VTI as the case study for this question, as it is the largest ETF out there. A better question would be: what happens to an extremely small ETF if the sponsoring financial institution closes?
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

nisiprius wrote: Fri Jan 14, 2022 10:43 am Alex_686 (or anyone who might know), what's your guess on the effective time lag between someone buying shares of VTI and the authorized participants literally buying the underlying shares of the stocks in VTI?
The short answer is that there is no lag, they have to do it before.

The chances of you actually buying shares from a AP is very very low. That is not how the market works. Most of the shares trading around are from 3rd parties who already have the shares.

But let us say you did.

You put in a order with a AP for some new shares. The AP has to deposit a market basket of shares with VTI to create the new shares.
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

UpperNwGuy wrote: Fri Jan 14, 2022 10:47 am It makes no sense to use VTI as the case study for this question, as it is the largest ETF out there. A better question would be: what happens to an extremely small ETF if the sponsoring financial institution closes?
Is the ETF profitable? You sell the managing rights to a new fund sponsor. This has been done for ETFs both large and small.
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Re: What happens to VTI if vanguard closes?

Post by nisiprius »

alex_686 wrote: Fri Jan 14, 2022 10:50 am
nisiprius wrote: Fri Jan 14, 2022 10:43 am Alex_686 (or anyone who might know), what's your guess on the effective time lag between someone buying shares of VTI and the authorized participants literally buying the underlying shares of the stocks in VTI?
The short answer is that there is no lag, they have to do it before.

The chances of you actually buying shares from a AP is very very low. That is not how the market works. Most of the shares trading around are from 3rd parties who already have the shares.

But let us say you did.

You put in a order with a AP for some new shares. The AP has to deposit a market basket of shares with VTI to create the new shares.
So the authorized participants are always anticipating demand, placing tiny almost-sure-thing gambles? And the only "delay" is a microscopic delay in how long it might take your order for VTI to execute, if it were a limit order and a tiny shortage in VTI resulted in a premium over NAV that exceeded your limit... before the authorized participants would seize the opportunity and create a few more shares of VTI?
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Re: What happens to VTI if vanguard closes?

Post by UpperNwGuy »

alex_686 wrote: Fri Jan 14, 2022 10:51 am
UpperNwGuy wrote: Fri Jan 14, 2022 10:47 am It makes no sense to use VTI as the case study for this question, as it is the largest ETF out there. A better question would be: what happens to an extremely small ETF if the sponsoring financial institution closes?
Is the ETF profitable? You sell the managing rights to a new fund sponsor. This has been done for ETFs both large and small.
That's what I thought. I just felt like the original question missed the point by picking one of the ETFs least likely to close.
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Re: What happens to VTI if vanguard closes?

Post by RetiredAL »

Watty wrote: Fri Jan 14, 2022 10:07 am You can put this at the very bottom of your list of things to worry about. It is not going to happen and if it did it would not be a problem.
+1
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

nisiprius wrote: Fri Jan 14, 2022 10:55 am So the authorized participants are always anticipating demand, placing tiny almost-sure-thing gambles? And the only "delay" is a microscopic delay in how long it might take your order for VTI to execute, if it were a limit order and a tiny shortage in VTI resulted in a premium over NAV that exceeded your limit... before the authorized participants would seize the opportunity and create a few more shares of VTI?
I am not sure I would call 100,000 units of VTI as "tiny" but basically yes.

It is probably best to think of the AP as a transmission entity rather than anything else. Adjacent to the APs are market makers (for both the stocks, options, and futures), arbitrators, high frequency trades, stock lending units (both long and short), etc. Then there are the actual long term investors - which would include day traders.

Only if the complex web is out of balance will somebody go the AP to either create or destroy 100,000 shares of VTI. Which tends to in the 100s of millions of dollars for VTI daily. So maybe 100,000 shares is tiny. It depends on which way you look at it.

But the majority of shares are traded are between 3rd parties. Newly minted shares are in the minority.
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Re: What happens to VTI if vanguard closes?

Post by LadyGeek »

masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
First, Vanguard does not own VTI. Actually, no investment management company owns any funds. See the wiki: Vanguard safety (Custody)
One of the warning signs of the Ponzi schemes conducted by Bernie Madoff and Stanford Financial was that both institutions self-custodied their assets. That is, the same institution was responsible both for managing the assets and for holding them.

By contrast, Vanguard (and every other US-regulated mutual fund company) must custody their assets with a third party. Many of the funds managed by Vanguard have their assets held with JPMorgan Chase.[2] JPMorgan is audited by PriceWaterhouseCoopers[3], which provides additional, independent verification that Vanguard's funds hold what they're supposed to.
From VTI's Prospectus and Reports -->Statement of Additional Information:
Service Providers

Custodians. JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179 (for the Extended Market Index, Mid- Cap Index, Mid-Cap Growth Index, Mid-Cap Value Index, Small-Cap Index, Small-Cap Growth Index, Small-Cap Value Index, and Total Stock Market Index Funds), State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111 (for the 500 Index Fund), and Bank of New York Mellon, 22 Liberty Street, New York, NY 10286 (for the Growth Index, Value Index, and Large-Cap Index Funds). The custodians are responsible for maintaining the Funds' assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign subcustodians or foreign securities depositories.

Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1800, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Funds' independent registered public accounting firm. The independent registered public accounting firm audits the Funds' annual financial statements and provides other related services.

Transfer and Dividend-Paying Agent. The Funds' transfer agent and dividend-paying agent is Vanguard, P.O. Box 2600, Valley Forge, PA 19482.
If an ETF actually fails, here's what happens: What Happens When an ETF Closes Its Doors?
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Re: What happens to VTI if vanguard closes?

Post by aristotelian »

alex_686 wrote: Fri Jan 14, 2022 10:51 am
UpperNwGuy wrote: Fri Jan 14, 2022 10:47 am It makes no sense to use VTI as the case study for this question, as it is the largest ETF out there. A better question would be: what happens to an extremely small ETF if the sponsoring financial institution closes?
Is the ETF profitable? You sell the managing rights to a new fund sponsor. This has been done for ETFs both large and small.
Or they get liquidated. https://www.etf.com/etf-watch-tables/et ... nopaging=1
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Re: What happens to VTI if vanguard closes?

Post by 100factorial »

alex_686 wrote: Fri Jan 14, 2022 10:37 am
100factorial wrote: Fri Jan 14, 2022 10:33 am
masonstone wrote: Fri Jan 14, 2022 9:31 am What happens to VTI if vanguard closes or goes bankrupt? How are the shares in that fund distributed to its owners?
A hypothetical guess ... Forty act funds (mutual funds and ETFs) would be left unscathed and new fund managers would be hired by the boards. Retail brokerage accounts could in theory become insolvent in a hypothetical scenario in which the retail brokerage division of V were to become severely impacted.
I have had ringside seats to a couple of brokerage bankruptcies.

With the exception of the clients on margin, retail client's assets are held in a segregated account and thus would be unaffected.

Most brokers are covered both by SPIC and independent insurance, so that covers most margin clients.

Regardless, client's with co-mingled assets with the brokerage have those assets over collateralized.
What is to prevent improper comingling of client and firm assets à la MF Global?

"MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer ..."

"Improper co-mingling, or mixing, of company and client funds took place ..."

https://en.m.wikipedia.org/wiki/MF_Global
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Re: What happens to VTI if vanguard closes?

Post by alex_686 »

100factorial wrote: Tue Jan 18, 2022 8:52 am What is to prevent improper comingling of client and firm assets à la MF Global?

"MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer ..."

"Improper co-mingling, or mixing, of company and client funds took place ..."

https://en.m.wikipedia.org/wiki/MF_Global
My specific knowledge on MF Global is low so I am going to sidestep the exact issues there.

Now, is the glass half full or half empty?

Prior to the 1970s this type of even was common. After the 1970s - I can't think of another example except MF Global. Now, if MF Global were specializing in derivates - well, all of those require collateral and thus stuff gets co-mingled. So that is a factor.

So, on the half full section. There are multiple audits and dual controls in place by regulation. Internal, external, regulatory, SPIC, insurance, etc. The penalties for failure are high, the benefits for breaking the rules are low. These areas are staffed full of boring accountants and operations people. They tend to be concisions people who are doing a rote job. They don't get paid a performance bonus based on trading or whatever.

So, on the half full section. Ultimately the responsibility falls on the broker. Operations, compliance, audit, and risk management are cost centers. They tend to be low paid and low on the hierarchy. Just reading the wiki it sounds like during the chaos of the crisis the operations department made a large error (rare, but it happens - usually it is recoverable) and were run over by management who were taking on risk on a gamble to save the firm.
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100factorial
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Re: What happens to VTI if vanguard closes?

Post by 100factorial »

Thank you alex_686 for the very helpful perspective.
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