What Happens to My iShares if Their Sponsor Goes Bankrupt?

Because of the popularity of gold ETFs, the wildfire of risk now burning through financial institutions, and some specific pressure on Barclays Bank (which sponsors one of the world's most successful gold ETFs), we thought you might appreciate an answer to the question:

"What happens to my money if Barclays goes bankrupt?"

This answer has two parts...

Part One: How an ETF Is Structured

ETFs are set up as independent entities with a balance of power held between different financial institutions. Most track baskets of stocks in a given category... like the technology sector... or China... or energy producers. Some track the price of a commodity, like oil, grains, or gold.

To illustrate, let's examine the Barclays-sponsored iShares COMEX Gold Trust, an ETF designed to track the price of gold. 

Investors can buy an "iShare" on the American Stock Exchange (under the ticker IAU), representing a "unit of fractional undivided beneficial interest" in the assets of the trust.

Shares are created and redeemed through certified broker-dealers, called Authorized Participants, and only in baskets of 50,000. The objective of the ETF is for the value of the iShares to reflect, at any given time, the price of gold owned by the trust, less any of the trust's expenses and liabilities. 

In other words, a shareholder has the right to tender his shares in exchange for a pro-rata portion of the fund's net assets, in this case gold. However, only an Authorized Participant can liquidate shares and only in blocks of 50,000. 

The "iShares" brand is a group of ETFs sponsored by Barclays Global Investors International, an indirect subsidiary of Barclays Bank.

The role of Barclays Global Investors, as the sponsor, is to assume certain administrative and marketing expenses on behalf of the trust in exchange for a fee (paid out of the trust).

As sponsor, Barclays does have certain rights to select a new trustee or custodian, but does not have any oversight of the day-to-day operations of the trust. Importantly, Barclays does not hold any of the assets or liabilities of the fund. 

The Bank of New York, as the trustee of iShares COMEX Gold Trust, is responsible for the day-to-day transactions of the trust. And the Bank of Nova Scotia serves as the custodian or "safekeeper" of the gold held by the trust.

The trustee's duties include the creation and redemption of shares, coordinating with the custodian the receipt/delivery of gold in response to share creation/redemption, selling the trust's gold in order to cover the trust's expenses, and also maintaining financial statements. 

Part Two: What Happens If Barclays Goes Under 

First off, should a run on Barclays Bank cause it to become insolvent, that doesn't necessarily mean all Barclays subsidiaries would collapse. 

For instance, Barclays Global Investors, a majority-owned U.S. subsidiary of Barclays Bank, is one of the largest institutional investment managers, with $2 trillion in assets under management as of June 2007.

But even if the subsidiary company did crumble, Barclays has no proprietary rights over the assets held by the individual trusts set up for the ETFs.

It's plausible Barclays could no longer act as sponsor of the funds, in which case either another institution would swallow it up or it would be liquidated.But it is far more likely that the former would occur. The iShares brand has been a fast-growing source of income for Barclays, growing by $100 billion to $408 billion in assets under management during 2007.

Good investing,So... our answer is, "Don't worry about it. Keep the bulk of your gold holdings in small coins and bars, but don't lose sleep over the assets you keep in Barclays ETFs."

Casey Research