What happens when the ETF's biggest holding collapses?

I’ve been explaining my investment strategy to my wife and she asked me a question (paraphrasing):

What happens to VT if Tim Cook finally decides to stop that crazy tech experiment and goes back to operating an orchard or Musk finally tips over the edge and puts his pet pigeon in charge of Tesla and the companies go bankrupt?

I assumed and told her that well, the ETF would be rebalanced, the Apple and Tesla stock sold and their share of the global stock market would be equivalently bought into the ETF with other stocks.

But, she said, who’s going to buy if they’re not worth anything? This kinda had me stomped.

I know, chances are this won’t ever happen as quick to such a large company, and considering Apple has 3% in VT it wouldn’t even be a big dip. But what would actually happen in such a case? Who would they sell the stock to? Or would they just not sell them since they are not worth a thing?

With the cash and the entrenched profitable business Apple has, they literally can’t go broke.

Lots of stocks get bought and sold for companies that are worth hardly anything - it just depends on the price. Even Wirecard’s stock was traded yesterday.

VT tracks an index. Whatever the index says, that will be the composition of the portfolio. So yes, if you’re asking if the index decides Apple is not in there anymore, VT will rebalance. If instead you’re asking what happens if Apple loses 99.9% of its value, then indeed VT will go down by about 3%.

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The answers above already said it.

But if you think of it, we’ve seen this before: Musk has been shifting his attention away from Tesla and the stock price has gone down, albeit I’m not sure how much of that is actually due to his own actions. But other than that, nothing much happened.

There is no need for rebalancing. VT holds x stocks of Apple. If the stock price drops by 90%, there will be still the same amount of Apple stocks in VT (just worth less).


These are all assumptions, but:

Most likely scenario: the problem in these cases would be the leadership. Apple’s brand, intellectual property, factories and network would still be worth something. Someone is likely to step in and acquire them (albeit at a lower price than their previous valuation) or initiate a merger. In this case, previous shareholders are likely to get something back (while not necessarily being made whole, which is ok because they are the ones with the deciding power who led the company in that direction, CEO notwithstanding). Everything remains orderly, the index may tank a bit (or more than a bit) but would be likely to rebounce: Apple’s business didn’t disappear, it is simply now done by someone else, who is also listed in the index.

Less likely but can happen: nobody steps in and the company goes bankrupt. In that situation, shareholders come last in line to get anything back from it. Let’s assume they get nothing, the stock is delisted, its shares are worth $0. This is likely to create contagion: investors become more hesitant to put their money in similar companies, money goes out of the stock market (and so, out of VT, VT tanks). It doesn’t cease to exist, though (it goes to bonds, bank accounts, real estate, gold, crypto, quality wine bottles or whatever).

On the longer term, the shock would pass, investors would see that companies are still valuable and still produce cashflows (that yogurt you’re buying at Migros? Nestlé is listed too, the net profits they make on it are actually the shareholders’ profits) and as long as those net profits are not zero (the global economy produces value), they have value to some investors. The price of stocks (shares of companies) varies depending on how much investors are willing to pay for their profits. On the longer run, the economy keeps running, the profits Apple was doing are made by other companies (that are likely to be in VT), those who bought shares of those companies when they were suffering from investors’ timidity make out like bandits (VT holders who hold on to their shares through the turmoil capture the full market returns, those 7% per annum everybody keeps referencing -though it’s closer to 5% for the global world market-), those who come and buy later have a less lucrative deal.

Edit: of course, there is also the scenario where the change of leadership goes smoothly. Steve Jobs left for Tim Cook and Apple is still among the best of them.


For comparison, Enron, which is one of the biggest bankruptcy scandals we have seen, was about 4% of the S&P500 index in 2000. Its share price went from $80 to $0 from February to December 2001, when they filed for bankruptcy.

Here’s how it played out:

Forgive the amateurish display, my graphing tools are not up to date.
The chart comes from Portfolio Visualizer: Backtest Portfolio Asset Allocation
The underlying is the SPDR S&P500 ETF Trust (SPY).
Results are accumulating, starting with $10K in 1994.
Unit is inflation adjusted USD.
I’m using a linear scale because I think dollar amounts speak more than rate of growth in these discussions (because it’s easier to have a grasp of it).

Edit: actually, here’s the logarithmically graphed one for good measure: