Can an ETF collapse?

Hi everyone,

I have a question that is bothering me about ETFs.

Let's assume the following situation:

1. There are no trades on all the underlying S&P500 stocks

2. We have a massive purchase of SPY ETF, in the order of several hundreds billions dollars.

Will this be reflected on the S&P 500 underlying stocks value? This is to say will they grow accordingly?

In other words, if somebody is buying or selling SPY, is he really buying or selling fractional shares from all the stocks in the S&P 500?

Thanks
 
first off, please don't post as a reply to a 6 month old thread that's off topic.

secondly, to answer your question, massive purchasing in SPY will increase the price of SPY. This creates a risk-free arbitrage situation, which hundreds of traders are observing to try and mae a return.

They will Do one of a few things...

-short SPY and buy the basket of 500 stocks, or another derivative product that tracks the SP 500.

-Actually exchange baskets of the 500 stocks to SPDR in exchange for shares of SPY. They'll then immediately sell the SPY to make a profit.

-futures transactions may be a possibility. there are prboably many more examples...

There are always things that provide balance. And any time there's opportunity for risk-free return, people will take it. So to answer your question directly, if there were hypothetically no transactions in the stocks, and a lot of buying in SPY, it would be followed, within seconds probably, with a lot of buying in the stocks.
 
ETF's, like GLD, will most likely have value returned the shareholder if SPDR's or whatever goes belly up. Note that ETN's do not have this promise, so be vigilant on the issuer's credit.
 
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