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Editor's note: Today's essay is a bit different from what we normally publish in our weekend edition. But given the huge amount of cash in the iShares group of investments, this is one of the most interesting things you can read right now. Below, our friends at Casey Research examine what would happen if Barclays – which owns the iShares brand – went under...

What Happens to My iShares if Their Sponsor Goes Bankrupt?

By Casey Research
Saturday, August 30, 2008

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...

The first explains how an exchange-traded fund (ETF) is structured; the second explains what potentially could happen if Barclays collapsed.

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.

Repeat after us, "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

Editor's note: This article appeared in the latest edition of The Casey Report. The upcoming edition, titled "Real Trouble in Real Estate" will answer all your questions on the current real estate meltdown. It will also show you how to avoid risks and make several unique investments to profit.Click here to learn more about a risk-free three-month trial to The Casey Report.

Market Notes


The market's take on England's economy: Things have been better.

In this case, the market has hammered England's currency, the pound, to a two-year low against the U.S. dollar. Our chart of the week shows this dramatic plunge.

A currency tends to rise when its home economy is running strong and interest rates remain high. A currency tends to fall when its home economy is struggling.

The market leads the news. So expect more headlines on weak U.K. retail sales, lower U.K. home prices, and lower U.K. interest rates ahead.

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