The Effect of a Failing Stock on Your ETF

Looking at ETF stocks is something that a lot of investors do on a regular basis. ETF stands for Exchange Traded Fund, which is basically like a mutual fund that you can trade on the stock exchange. Therefore, a typical ETF is made up of many shares of different stocks that are also traded on the exchange. If you own shares in an ETF, you might be wondering what the effect of a failing stock is on your ETF shares. Here are a few things to keep in mind in that regard.

Failing Stocks

ETFs are designed to be very diversified. Therefore, the fund manager for an ETF designs the portfolio so that it can withstand fluctuations. They buy multiple stocks so that one stock is not going to make or break the fund. 

With that being said, many ETFs have a good percentage of their assets that are made up by a single stock. Therefore, it can be significantly affected if it keeps getting worse. 

In most cases, it will take a negative performance from several different stocks in order to really hurt the shareholders of an ETF. Therefore, one stock moving will usually have a slower affect on the overall performance of the ETF. 

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