ETF total loss – Lose all your assets through ETFs?
ETFs (Exchange Traded Funds) are one of the most popular forms of investment for private investors. They offer broad diversification and are cost-efficient, making them an ideal instrument for long-term wealth accumulation.
The risk is reduced by spreading the investment across different companies, sectors and regions. However, ETFs are not completely free of risks.
Various events, such as the almost complete loss in value of Russian ETFs following the war in Ukraine, have shown that a total loss can be possible in exceptional cases. But how great is this risk really? What would it mean if an ETF lost its entire capital and how can investors protect themselves against this?
In brief:
- Investing in broadly diversified, physically replicating ETFs, such as the MSCI World, reduces the risk of a total loss by diversifying across many sectors, countries and currencies.
- Thematic and synthetic ETFs are more susceptible to specific risks. They should only be used as a supplement in a diversified portfolio, and investors should fully understand how they work and the risks involved.
- A long-term investment horizon and regular portfolio reviews – including rebalancing – are crucial in order to ride out short-term market fluctuations and optimally adapt the portfolio to changing market conditions.
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What is a total ETF loss and how likely is the scenario?
An ETF total loss means that the entire invested capital is completely lost and the value of the investment falls to zero. With an investment instrument as broadly diversified as ETFs, which invest in a large number of securities, a total loss seems unlikely at first glance.
ETFs are generally designed to minimise risk through diversification. One example of this is the MSCI World, which invests in over 1,500 companies from 23 industrialised countries.
This broad diversification across different sectors, countries and currencies makes a total loss extremely unlikely. To cause a total loss, all of these companies would have to become insolvent at the same time, which is virtually impossible in reality.
4 possible scenarios for a total ETF loss
A total loss on an ETF is extremely rare, but there are certain scenarios that could lead to it. It is important to understand these in order to correctly assess the associated risks and take precautions if necessary.
1. Market collapse and political risks
The most likely scenario for a total loss is the collapse of the underlying market or sector in which the ETF invests. Sector-specific or regional ETFs, such as those focussing on emerging markets, can be particularly vulnerable.
One prominent example of this is Russian ETFs, which became almost worthless due to sanctions and trade restrictions following the war in Ukraine. The MSCI Russia, for example, was excluded from trading due to political interventions and market closures, as a result of which the securities it contains almost completely lost their value.
Similar risks exist in other politically unstable regions. Tensions between China and Taiwan, for example, could lead to Chinese and Taiwanese shares being excluded from trading. ETFs with a high proportion of these shares would record significant losses in such a case. Although it is rare for an entire market to collapse, geopolitical tensions, natural disasters or far-reaching regulatory intervention could increase this risk.
2. Emerging markets are also at risk
ETFs that invest in emerging countries or emerging markets are generally riskier and therefore more at risk of total loss scenarios. Although emerging markets offer high potential returns, as the economies of these countries are often in a growth phase, they are also more susceptible to political instability, economic fluctuations and regulatory intervention.
In countries with less established financial markets and weaker infrastructure, there may be sudden changes in legislation or expropriations that severely affect companies and thus also the ETFs that invest in them.
One example of this is the recurring turmoil in countries such as Venezuela and Argentina, where political crises, high inflation and currency crises have led to companies and markets losing massive amounts of value.
In other emerging markets, too, the risk of corruption, poor government practices and currency controls can severely impair the investment environment. In extreme cases, such events could significantly reduce the value of an ETF invested in emerging markets or even lead to a total loss, especially if the ETF is heavily focussed on certain regions or sectors.
3 Issuer risk: What happens if the ETF provider becomes insolvent?
Many investors fear that a total loss could occur if the ETF provider becomes insolvent. In fact, this scenario is considered unlikely as ETFs are separate assets from the assets of the issuer. This means that the assets of the ETFs are legally protected and cannot be used to settle debts in the event of the provider’s insolvency.
If an ETF provider were to become insolvent, the ETF would usually either be taken over by another management company or liquidated. In this case, investors would receive the value of their units. This mechanism ensures that even if the issuer becomes insolvent, the risk of a total loss is significantly reduced.
The probability that an established ETF provider like BlackRock would go bankrupt is extremely low:
- BlackRock manages enormous assets totalling several trillion dollars.
- The business model of ETF providers is very stable, as they mainly charge fees for managing the funds.
- Large asset managers such as BlackRock are strictly regulated and monitored.
4 Synthetic ETFs and swap counterparty risk
Synthetic ETFs do not rely on the physical purchase of the securities contained in the index, but use swaps – exchange transactions with financial institutions – to achieve the index return.
This involves what is known as counterparty risk: if the swap partner, usually a bank, becomes insolvent, this could lead to losses. However, European guidelines limit this risk to a maximum of 10% of the fund assets.
In addition, swap partners are obliged to deposit collateral to further minimise the risk of a total loss.
Despite these limitations, the lack of transparency of synthetic ETFs remains a point of criticism. Investors are often unsure which assets are deposited as collateral, which weakens confidence in this form of investment.
Even if no total loss due to a swap is known to date, many experts advise favouring physical ETFs if you want to avoid the counterparty risk completely.
Good to know:
Physical ETFs buy the securities of the index directly and own them. Synthetic ETFs replicate the index using derivatives (swaps) and bear the counterparty risk.
Measures for investors to minimise risk
Despite the comprehensive safety mechanisms of ETFs, it is advisable for investors to take additional precautions to further minimise the risk of a total loss. Conscious selection and management of the ETF portfolio can help mitigate the impact of extreme market events or other risks.
Choose broadly diversified, physically replicating ETFs
One of the most effective strategies for minimising risk is to invest in broadly diversified, physically replicating ETFs. The best ETF for you will depend on your individual goals and risk appetite. ETFs such as the MSCI World are among the preferred choices due to their broad diversification.
Physically replicating ETFs such as the MSCI World or the MSCI Emerging Markets invest in hundreds to thousands of companies from different sectors and countries.
A classic example of a weighting is the 70:30 ratio, in which 70 % is invested in developed markets (such as the MSCI World) and 30 % in emerging markets (such as the MSCI Emerging Markets).
This diversification further reduces the risk of a total loss, as the investment is not limited to one sector or region, but is spread globally.
The strength of such broadly diversified ETFs lies in their diversification. By investing in a variety of sectors, such as technology, healthcare, financials, Consumer Staples and industrials, the portfolio is less susceptible to the downturn of a single sector.
Even if one sector or country is affected by a crisis, the ETF as a whole can remain stable because the other sectors or regions continue to perform well.
An MSCI World ETF, for example, spreads its investments across more than 1,500 companies from 23 industrialised countries and 10 sectors. A total loss would only occur here if all of these countries and sectors collapsed at the same time, which is extremely unlikely.
Another advantage of broadly diversified ETFs is geographical diversification. By investing in companies from many different countries, the portfolio is less susceptible to regional crises. In addition, investments are made in different currencies, which spreads the currency risk. Even if the value of an individual currency fluctuates strongly or depreciates, the overall value of the ETF remains more stable as other currencies can offset this.
Caution with theme-specific ETFs
Thematic ETFs that focus on a specific industry, sector or region – such as technology, renewable energies or emerging markets – can be an attractive investment opportunity at first glance. They offer the opportunity to invest specifically in growth industries or promising markets. However, these ETFs are also associated with increased risks:
- Less diversification: In contrast to broadly diversified ETFs, theme-specific variants only invest in a limited selection of companies within a specific market segment. This limited diversification makes the portfolio more susceptible to fluctuations in this specific area.
- Greater susceptibility to specific risks: As these ETFs focus on niche markets, they are heavily dependent on global trends, political developments or economic conditions. A negative event in the sector or region in which they invest can therefore have a significant impact on their performance.
Examples of risks associated with thematic ETFs
- Technology ETFs: They could benefit significantly from a technological revolution, but are also particularly susceptible to risks such as market overheating, industry scandals or regulatory intervention. For example, new laws on data regulation or suddenly tougher competitive conditions could have a significant impact on the value of such ETFs.
- Emerging market ETFs: These ETFs often promise high returns as they invest in emerging markets. However, they also harbour considerable political and economic risks. These include sudden changes of government, trade restrictions or currency crises, which can have a direct impact on the value of the assets held.
Due to these risks, thematic ETFs should only be used as a supplement to a broadly diversified portfolio. An excessive weighting of these ETFs increases volatility and makes the portfolio more susceptible to market fluctuations and the risk of total loss within the sector in question.
Synthetic ETFs and counterparty risk
Synthetic ETFs are another category that requires particular caution. These ETFs replicate the performance of an index using financial derivatives (swaps) instead of buying the securities contained in the index directly. This method makes it easier to replicate indices and can also be more cost-efficient. However, it also harbours the so-called counterparty risk:
Counterparty risk: If the swap partner, usually a bank, becomes insolvent, the synthetic ETF could suffer considerable losses. Although European UCITS guidelines limit this risk to a maximum of 10% of the fund assets and stipulate additional collateral, the lack of transparency with regard to the collateral actually deposited remains a major point of criticism.
Due to these risks, investors should only consider synthetic ETFs if they fully understand how they work and the associated risks. For security-oriented investors, it is generally advisable to favour physically replicating ETFs, as these avoid counterparty risk and therefore offer greater transparency and security.
| Criterion | Thematic ETF | Broadly diversified ETF | Synthetic ETF |
| Diversification | Low | High | Medium |
| Risks | High (sector-specific, political) | Low (wide spread) | Counterparty risk |
| Susceptibility | Heavily dependent on trends | Less dependent | Depending on the swap partner |
| Recommendation | As a supplement | For long-term investment | For experienced investors only |
Comparison: Thematic ETF vs. broadly diversified ETF / Synthetic ETF vs. physical ETF
Long-term investment horizon and regular portfolio review
One of the most important strategies for minimising risk is to pursue a long-term investment horizon and carry out regular portfolio reviews.
A long-term investment horizon enables investors to ride out short-term market fluctuations and achieve a stable ETF return. Regularly reviewing and rebalancing the portfolio also helps to achieve the desired return.
By investing over a longer period of time, investors benefit from the so-called cost-average effect. With regular investments, for example in the form of an ETF savings plan, investors buy shares in different market phases.
The risk of investing a large sum at an unfavourable time is spread over time. In addition, a long-term investment horizon smoothes out the effects of short-term price fluctuations. Even in phases of market crises, prices often recover, so that an investor who has sufficient time can ride out the lows and achieve positive returns in the long term.
It is important to review your portfolio regularly, at least once a year. You should pay attention to changes in the market situation, political developments, economic conditions and the performance of the selected ETFs.
A regular review makes it possible to make adjustments, for example by reducing an excessively risky sector or replacing one ETF with another with a more favourable diversification structure. It can also be useful to review the portfolio allocation and, if necessary, adjust the ratio of theme-specific to broadly diversified ETFs.
Another aspect of the portfolio review is rebalancing. This involves restoring the original weighting of the portfolio, for example by selling shares in well-performing ETFs and reinvesting in underweighted but strategically sensible investments. This procedure ensures that the risk remains constant and prevents the portfolio from becoming too risky due to an excessive weighting of certain sectors or regions.
Investing in different ETF types and markets
In addition to the choice between physically replicating and synthetic ETFs, the addition of different ETF types can further diversify the risk. Money market ETFs offer additional security as they invest in short-term, safe bonds and are less volatile.
Property ETFs can also be a sensible addition, as they focus on the property market, which can also develop independently of equity markets.
It is also advisable not to focus exclusively on established industrialised markets. A mix of developed markets (e.g. USA, Europe) and emerging markets (e.g. Asia, Latin America) makes it possible to benefit from different economic cycles.
However, emerging market ETFs should only make up part of the overall portfolio, as they are associated with higher political and economic risks.
How to invest in the MSCI World: a comparison of the three best brokers
The MSCI World is an excellent way to invest in a broad selection of companies from different countries and sectors. To invest in this ETF, you need the right broker.
- Freedom24 is particularly suitable for investors who want to invest in international stock exchanges. The variety of trading centres is a big plus here, but there are no savings plan options for the MSCI World.
- Trade Republic offers a user-friendly platform with favourable order fees and is ideal for beginners. The savings plan options from 1 euro are an additional highlight.
- Scalable Capital impresses with flexible savings plans and a flat-rate option for frequent traders. It also offers the option of automatic reinvestment of dividends. A plus point for long-term investors.
When choosing between Scalable Capital vs Trade Republic and Freedom24 comes down to your trading habits and preferences. Trade Republic scores with simplicity and low costs, while Scalable Capital is attractive for regular investors with its flat rate option and savings plan features.
| Freedom24 | Scalable Capital | Trade Republic | |
| Depot management | Free of charge | Free of charge | Free of charge |
| Order fees | € 2 + € 0,02 (per share) | Gettext € 0,99; XETRA € 3,99 0,01 % (min. € 1,50) | LS Exchange 1 € |
| Number of shares | 40.000 | 8.000 | 9.000 |
| Number of ETFs | 1.500 | 2.500 | 2.400 |
| Number of ETF savings plans | 0 | 2.500 | 1.900 |
| Starting bonus | Freedom24 Bonus Free shares worth €79 – €529 (until 31 December 2024) | Scalable Capital Bonus Currently no bonus | Trade Republic Bonus Currently no bonus |
| Experience report | Freedom24 Experience | Scalable Capital Experience | Trade Republic Experience |
Conclusion: A total loss with ETFs is extremely unlikely
Although a total loss is theoretically possible with ETFs, it is extremely unlikely due to the in-built protection mechanisms. The broad diversification of physically replicating ETFs, strict UCITS regulations and their status as special assets offer investors comprehensive protection.
Synthetic ETFs, although higher risk, are also well protected by collateral and counterparty limits. The key lies in the careful selection of ETFs, deliberate risk diversification and a focus on long-term investment strategies.
With the right choice of ETFs, conscious risk diversification and a long-term investment horizon, e.g. via an ETF savings plan, ETFs can be a robust option for long-term wealth accumulation and ETF retirement provision.
For passive income, a dividend ETF that focuses on companies with a high payout ratio can be an interesting addition to a portfolio. However, it is also important to ensure broad diversification with these ETFs and not to focus too heavily on one particular sector.
FAQ – Frequently asked questions about ETF total loss
