There are a lot of risks included, but for the sake of argument, what kind of investment does not have risks? There is no absolutely risk-free investment. But to lay it out in front of you, following are some risks of Exchange Traded Fund better known as ETF:
FOREIGN INVESTMENTS:
It can be difficult to invest in low or mid-cap ETFs outside your country for foreign stocks or investments. The investors are limited to only large-cap stocks. Which narrows down the exposure of the investor. That is why it is mostly recommended that it is safer to invest in your own country. For example, a UK ETF would be preferable for the people living in the U.K.
THE DIVIDEND DISADVANTAGE:
Then there is the dividend disadvantage. The dividend yield of an individual stock is much higher than an ETF. Of course, there are ETFs which pay a dividend, but it is not as beneficial as a high-yielding stock. Because ETFs cover a very large spectrum in the exchange market, the dividend yield averages out to be much lower than stock.
INDIVIDUAL SHARES:
Another point that makes individual stocks better than ETF is taxable income. If an investor buys different stocks and the prices go down, he can sell the shares at a loss. While for an Exchange Traded Fund investor, it is not possible to buy or sell individual shares. The investor will have to sell the whole stock.
LEVERAGED ETFs:
Leveraged ETFs are basically investments that use derivatives or debts to amplify and increase the net benefit by a double or triple ratio. It can be a double leveraged or a triple leveraged ETF. But here is the set back; You must have heard of the saying “the faster you rise, the harder you fall”. Well, if not in most cases, it is definitely applicable in this case. Because a leveraged ETF doubles or triples the net gain, it also doubles or triples the net loss if things were to go south.
If the market suffers a fall, and a simple non-levered ETF drops by let’s say 30%, a triple-leveraged ETF will drop by 90%. And it will cost the investor a lot of money and time. So, if you are planning for long term investment, leveraged ETFs must be planned deeply before deciding on them.
HIGH MANAGEMENT FEE:
If you compare the Exchange-traded fund with mutual or index fund, the advantages might weigh out the disadvantages. However, if you compare an ETF with stock, there are a bit more disadvantages. For instance, the management fee of the exchange-traded fund is much higher as compared to an individual stock, as there is no management fee for a stock. This leaves the investor with a high bid-ask spread.
COMMISSION FEE:
ETF can be a win-win game if played correctly. While the most popular feature of ETF is that you can buy or sell the assets at any time during the market open hours, it is not recommended. Even if ETFs are low-cost investment, they are not commission-free. That is for every purchase or sale you make throughout the day, a commission-fee is charged. Which can sum up to a huge amount if you keep going in and out of stocks
CURRENCY RISK:
Let’s say that you are in England, and instead of investing in a U.K. ETF, you have invested in the U.S.A. During your investment, if USD is to fall by 5%, but the market remains the same for the U.S. citizens, then it would be 5% loss for you, but not for someone in the United States. The same is with a 5% rise.
So, in your own country, this kind of risk is avoided. Although, if you are willing to take the risks, then it is your investment and your luck.
