The main risks associated with trading ETFs include:
- Market risk: ETFs are subject to market risk, which is the risk that the value of the ETF may fluctuate due to changes in the market or the underlying securities held within the fund. This risk is inherent in all investments and cannot be eliminated.
- Credit risk: ETFs that invest in bonds or other fixed income securities are subject to credit risk, which is the risk that the issuer of the security may default on its debt obligations. This risk may be higher for ETFs that hold a large number of bonds with lower credit ratings.
- Interest rate risk: ETFs that invest in bonds or other fixed income securities are also subject to interest rate risk, which is the risk that changes in interest rates may impact the value of the securities within the fund. When interest rates increase, the value of fixed income securities may decline, which could negatively impact the value of the ETF.
- Liquidity risk: ETFs may be less liquid than individual stocks, which means they may be more difficult to buy or sell in large quantities. This can be particularly true for ETFs that track more obscure or specialized markets.
- Management risk: ETFs that are actively managed by a fund manager may be subject to management risk, which is the risk that the fund manager's investment decisions may not be successful and may result in lower returns for the ETF.
- Tracking error risk: There may be differences between the ETF performance and that of the underlying index or benchmark. This tracking error may affect the ETF's ability to accurately track the benchmark's performance.
Also, when purchasing equities of a foreign company, investors should additionally take into account the political risk, economic risk, legal risk and potential fluctuations of currency exchange rate.
Whilst ETFs usually provide a higher level of diversification than single stocks, diversification does not ensure a profit and does not protect against losses in declining markets. Successful replication of the benchmark by the ETF, does not guarantee profits and even might result in losses shall the benchmark itself underperform. Please also note that past performance does not guarantee future returns.
The content of this page is for general information purposes only and does not constitute financial advice. If you have any questions about your personal circumstances please seek professional and independent advice. Revolut is not a financial advisor.
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