What Happens Inside XEQT When a Company Goes Bankrupt

My dad called me a few months ago with a question that I think every XEQT investor eventually gets from someone they know. He had been reading about a small Canadian company that filed for creditor protection, and he asked: “You have that one ETF with thousands of stocks in it, right? What happens if one of those companies goes bankrupt? Do you just… lose that chunk of money?”

He said it the way most people do – with genuine concern, as though a single company going belly up might blow a hole in my portfolio. I could hear the worry in his voice. He remembered Nortel. Every Canadian of a certain generation remembers Nortel. It was once the crown jewel of the TSX, making up over 30% of the entire Canadian index at its peak. When it collapsed, people lost their savings, their pensions, their retirement plans. That kind of financial trauma does not fade easily.

So I told him the truth: if a company inside XEQT goes bankrupt, the most likely outcome is that I would not even notice. Not because I am not paying attention – but because that is exactly how XEQT is designed to work. Let me walk you through why.

1. The Short Answer: Nothing Dramatic Happens

Let me give you the punchline up front, because I know some of you are reading this at 2 AM in a mild panic.

If a single company inside XEQT goes bankrupt, your portfolio barely moves.

XEQT holds exposure to over 9,000 individual companies across 49 countries. Even XEQT’s largest single holding – Apple, which sits at roughly 2.5% to 3% of the total portfolio – would not destroy you if it vanished overnight. And Apple is not going bankrupt any time soon.

The companies that actually go bankrupt are almost never the massive blue chips at the top of the index. They are the small and mid-cap companies further down the list, each representing a tiny fraction of the overall portfolio. We are talking about holdings that might represent 0.01% of XEQT, or even 0.001%. If a company at that size goes to zero, the impact on your portfolio rounds to basically nothing.

This is not an accident. This is the entire point of diversification.

2. How Index Funds Handle a Company Approaching Bankruptcy – Step by Step

One of the things I find most reassuring about XEQT is that it does not just passively sit there while a company spirals toward zero. The index fund structure has a built-in mechanism that gradually reduces your exposure to failing companies long before they actually go bankrupt.

Here is how it works, step by step:

Step 1: The stock price drops, and your exposure shrinks automatically

XEQT’s underlying funds are market-cap weighted. That means each company’s weight in the index is proportional to its total market value. When a company’s stock price drops, its market cap shrinks, and its weight in the index automatically decreases.

If a company that was worth $50 billion drops to $5 billion, its representation in the index shrinks by 90%. You do not have to do anything. The math does it for you.

Step 2: The company’s weight in XEQT becomes negligible

By the time a company is truly on the brink of bankruptcy, it has usually lost 90% to 99% of its value. A company that might have once been 0.5% of an index is now 0.005%. Its impact on your portfolio is already almost invisible.

Step 3: The index provider removes the company

The major index providers – S&P Dow Jones, MSCI, and FTSE Russell – all have rules for when a company gets removed from their indexes. Triggers include:

• Market cap falling below a minimum threshold
• The stock being delisted from its exchange
• The company filing for bankruptcy protection
• Trading volume dropping below acceptable levels
• The company failing to meet basic listing requirements

When any of these triggers are hit, the index provider announces the removal, usually with a few days of notice. The company gets dropped from the benchmark index.

Step 4: BlackRock sells or writes off the position

Once the index provider removes the company, BlackRock’s fund managers for XEQT’s underlying ETFs (like ITOT for U.S. stocks, XIC for Canadian stocks, XEF for international stocks, and XEC for emerging markets) adjust their holdings to match the updated index. They sell whatever shares remain, or if the stock has been delisted entirely, they write the position down to zero.

Step 5: The capital is reallocated

The remaining companies in the index each get a slightly larger share of the pie. The capital that was tied up in the bankrupt company – whatever tiny amount was left – gets redistributed across thousands of other holdings. The portfolio heals itself.

The entire process is automatic. You do not need to monitor anything, make any decisions, or take any action. This is one of the most underappreciated advantages of owning XEQT – it handles corporate death with quiet, mechanical efficiency.

3. Real-World Examples: When Companies Failed and Index Investors Barely Noticed

Theory is nice, but let me show you how this has actually played out in real life. These are some of the most spectacular corporate failures in market history – and in every case, diversified index investors came out fine.

Nortel Networks (Canada, 2009)

This is the one every Canadian knows. Nortel was once the most valuable company on the TSX, accounting for over 30% of the S&P/TSX Composite Index at its peak in 2000. It was the Canadian tech darling – telecom equipment, fiber optics, the backbone of the internet. Pension funds loaded up on it. Individual investors bet their retirements on it.

Then it collapsed. Accounting scandals, the dot-com bust, mismanagement. The stock went from over $120 per share to pennies. Nortel filed for bankruptcy protection in January 2009, and thousands of Canadian investors were devastated.

But here is the critical detail: the TSX index itself recovered. As Nortel’s weight shrank from 30% to essentially zero, its impact on the broader index diminished proportionally. If you had held a total Canadian market index fund instead of individual Nortel shares, you would have suffered during the dot-com crash (because Nortel dragged the index down while it was still a large component), but you would have recovered fully as the rest of the market grew.

The people who lost everything were the ones who held concentrated positions in Nortel. The index holders took a hit and moved on.

Enron (United States, 2001)

Enron was the seventh-largest company in the United States by revenue when it collapsed in one of the most infamous corporate fraud scandals in history. Executives had fabricated earnings, hidden billions in debt, and deceived investors and regulators for years.

When the truth came out, Enron’s stock went from $90 to $0.26 in a matter of weeks. 20,000 employees lost their jobs. Many had their retirement savings concentrated in Enron stock through the company’s 401(k) plan.

But for S&P 500 index investors, the impact was minimal. At its peak, Enron was roughly 0.7% of the S&P 500. By the time it was removed from the index on November 30, 2001, its weight had already shrunk to nearly nothing. An S&P 500 index fund holder would have barely noticed the blip.

Wirecard (Germany, 2020)

Wirecard was a German fintech company that was once worth over $24 billion and was a member of the prestigious DAX 30 index (Germany’s blue-chip benchmark). It turned out to be an elaborate fraud – $2.1 billion in cash on its balance sheet simply did not exist.

The stock crashed from over EUR 100 to under EUR 2 in a matter of days. It was removed from the DAX. For anyone holding Wirecard as a concentrated position, it was a catastrophe.

For holders of international index funds (like XEQT’s underlying XEF fund), Wirecard’s weight had already been shrinking as the stock fell. By the time it was removed from the index, the impact on a global portfolio was negligible.

Here Is the Pattern

Notice the pattern: by the time a company actually goes bankrupt, its weight in the index has already shrunk so much that the final step to zero is almost imperceptible. The damage was absorbed gradually, not all at once.

4. The Math of Diversification: Running the Numbers

Let me put some concrete numbers on this so you can see just how protected you are.

The worst-case hypothetical

Let’s say Apple – XEQT’s single largest holding at roughly 2.8% of the portfolio – went to zero overnight. No warning, no gradual decline, just poof, gone. (This is essentially impossible for a $3 trillion company, but let’s run the thought experiment.)

If you had $100,000 in XEQT:

• Your loss from Apple going to zero: $2,800
• Your remaining portfolio value: $97,200
• Percentage drop: 2.8%

That is a bad day. It is not a catastrophe. It is roughly equivalent to a normal market fluctuation on a volatile trading day. You have probably already experienced a 2.8% drop in XEQT and did not even realize it because it recovered the following week.

The realistic scenario

Now let’s look at what actually happens with real bankruptcies. The companies that go bankrupt are almost never in the top 100 holdings. They are the small-cap companies at the bottom of the list.

A typical company that might go bankrupt in XEQT’s portfolio would have a weight of approximately 0.001% to 0.01% of the total portfolio. Here is what that means:

You would lose somewhere between one dollar and fifty dollars on a typical bankruptcy event. You lose more money in a year to your ETF’s management expense ratio. You probably spent more on coffee this morning.

This is the power of diversification at scale. When you own thousands of companies, any single failure becomes a rounding error.

5. Why This Is the Whole Point of XEQT

I want to zoom out for a moment, because I think this topic reveals something fundamental about why XEQT works.

The classic metaphor is that you own the haystack, not the needle. When you buy individual stocks, you are making a bet that you have found the right needle – the company that will grow, that will not commit fraud, that will not get disrupted, that will not go bankrupt. Every individual stock picker takes on company-specific risk. If they are wrong about even one of their concentrated positions, the damage can be severe.

XEQT investors take a completely different approach. You are saying: “I do not know which companies will win and which will lose. I do not know which ones will be the next Apple and which will be the next Nortel. So I am going to own all of them and let the winners carry the losers.”

Here is the thing that blows most people’s minds when they first hear it: most individual stocks underperform the market. Research by Hendrik Bessembinder at Arizona State University found that from 1926 to 2016, just 4% of all publicly traded U.S. stocks accounted for the entire net wealth creation of the U.S. stock market. The other 96% collectively matched Treasury bills. More than half of all individual stocks delivered negative lifetime returns.

That means if you are picking individual stocks, the odds are literally against you. You are more likely to pick a loser than a winner. But when you own the entire market through XEQT, you are guaranteed to own the 4% that drive all the returns – along with the 96% that do not. The winners more than compensate for the losers, including the ones that go to zero.

This is why trying to avoid bankruptcies by picking “safe” individual stocks is actually riskier than owning everything. You might avoid the companies that go bankrupt, but you also might miss the companies that return 10,000%. XEQT owns them all, and the math works out in your favor over time.

6. The Self-Healing Index: How XEQT Replaces the Dying with the Growing

There is another mechanism at work here that I think is genuinely beautiful, and it is one of the strongest arguments for index investing.

Indexes are self-healing. They naturally replace dying companies with growing ones.

Think about the S&P 500. This index has existed since 1957. If you look at the original 500 companies and compare them to the 500 companies in the index today, only about 50 of the originals remain. The rest have been replaced – through mergers, acquisitions, bankruptcies, and simply being outgrown by newer, more dynamic companies.

Here are a few of the companies that were once major S&P 500 components and are now gone:

• Kodak – once the king of photography, replaced by digital cameras and smartphones
• Sears – once the largest retailer in America, overtaken by e-commerce
• General Electric – once the most valuable company in the world, broken up and diminished
• Lehman Brothers – once a storied Wall Street bank, wiped out in the 2008 financial crisis
• Blockbuster – once dominated home entertainment, destroyed by Netflix

And here are some of the companies that replaced them:

• Apple – went from near-bankruptcy in 1997 to the most valuable company on earth
• Amazon – started selling books online, now dominates cloud computing and retail
• NVIDIA – made graphics cards for gamers, now powers the AI revolution
• Tesla – made electric cars mainstream against overwhelming skepticism
• Shopify – a Canadian company that grew from nothing to a top TSX listing

This constant renewal is built into XEQT’s design. The index committees at S&P, MSCI, and FTSE Russell regularly review their indexes and swap out declining companies for rising ones. It is like a sports team that constantly drafts new talent to replace retiring players. The roster is always being refreshed.

What this means for you as an XEQT investor is that you do not need to worry about the long-term composition of your portfolio. You do not need to identify which companies are dying and sell them before they go to zero. The index does that for you. And you do not need to identify which new companies are rising and buy them early. The index does that for you too.

Over the past 100 years, the U.S. stock market has returned roughly 10% per year on average, despite world wars, pandemics, financial crises, and countless individual company bankruptcies. The index kept growing because it kept replacing the dead weight with new growth. XEQT captures that same mechanism across global markets.

7. The Nortel Lesson: Why Concentration Is the Real Risk

I keep coming back to Nortel because it is the most vivid Canadian example of what happens when you do not have the protection of diversification.

At its peak in September 2000, Nortel Networks had a market cap of approximately $398 billion CAD. It represented over 30% of the S&P/TSX 60 Index. This was an insane level of concentration, but at the time, nobody questioned it. Nortel was Canada’s tech champion. Analysts predicted it would keep growing. Employees loaded up their RRSP and pension accounts with Nortel stock. Individual investors bet their retirement on it.

Then it fell. And it kept falling.

The people who were most devastated were those with concentrated positions – employees who held Nortel stock in their company plans, individual investors who had made it a cornerstone of their portfolios, and pension funds that were overweight in Canadian tech.

If those same investors had held a globally diversified portfolio like XEQT, Nortel’s collapse would have been a minor event. Even at its peak weight of 30% of the Canadian index, remember that the Canadian allocation in XEQT is only about 26% of the total portfolio. So Nortel at its absolute peak would have been roughly 7-8% of an XEQT-like portfolio – painful if it went to zero, but survivable. And because the stock price decline was gradual over nine years, the actual impact would have been absorbed incrementally, not all at once.

The lesson from Nortel is not “do not invest in Canadian companies.” The lesson is do not put too many eggs in one basket. XEQT puts your eggs in 9,000+ baskets. That is the difference between a story about devastation and a story about a minor blip.

8. Company Bankruptcies Are a Feature, Not a Bug

I want to leave you with a perspective shift that changed how I think about this topic entirely.

Company bankruptcies are a natural and healthy part of market capitalism. They are how the economy clears out businesses that are no longer serving customers well, allocating capital poorly, or simply being outcompeted by better alternatives. When Blockbuster went bankrupt, it freed up capital, talent, and resources that flowed to companies like Netflix. When Nortel collapsed, the telecommunications industry restructured and evolved.

Creative destruction – the economist Joseph Schumpeter’s term for this process – is the engine that drives long-term economic growth. Old companies die. New companies are born. The economy adapts and grows. The stock market, measured by broad indexes, captures this process and turns it into wealth for investors.

XEQT is designed to sit on top of this process and harvest the net positive result. It does not try to avoid bankruptcies. It does not try to predict which companies will fail. It simply owns the entire market and lets the natural process of creative destruction work in your favor.

Here is the beautiful irony: the fact that companies inside XEQT can go bankrupt is actually part of what makes XEQT work. If no company ever failed, there would be no reallocation of capital to more productive uses. The economy would stagnate. Returns would diminish. The constant churn of corporate life and death is what generates long-term market returns.

So the next time someone asks you, “What happens if a company in XEQT goes bankrupt?” – you can tell them the truth:

Nothing dramatic. The stock’s weight has already shrunk to almost nothing before bankruptcy is even filed. The index removes the company. BlackRock adjusts the holdings. The capital gets reallocated. The portfolio moves on. And over the long term, the winners in XEQT vastly outnumber and outperform the losers.

That is not a weakness of XEQT. It is the entire point.

This post is for educational purposes only. I am not a financial advisor. XEQT is a diversified all-equity ETF, but all equity investments carry market risk. Past performance of indexes and ETFs does not guarantee future results. Company-specific examples are used for illustration and do not represent recommendations. Always do your own research or consult a qualified financial professional before making investment decisions.