Summary: We’ve talked about the advantages of ETFs, but let’s not forget that all investments come with risk. To put it simply, risk affects the value of your investment. More risk can mean more reward but less certainty around the outcome. For every investment decision, you need to be aware of and comfortable with the level of risk to take. We will take you through some of the ways you can prepare for risk when looking at ETFs.
Capital risk: All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Tax risks: International taxes will impact your return. Do your research to assess how much your ETF returns may be taxed.
Currency risks: ETFs feature some level of currency risks. International ETFs are priced in local currencies, so changes in exchange rate will impact the value of your investment.
Liquidity risk: Liquidity is the ability to turn an investment into ready cash quickly, with no loss in value. Low liquidity of an ETF s can lead to higher trading costs or difficulty in buying or selling the ETF.
For a regular investor to assess liquidity, you should look at statistics such as:
If you are an investor who is trading a large quantity of shares at once, the liquidity of the ETF’s underlying securities is the more important factor.
You can’t eliminate risk completely but you can reduce it in many ways. Diversification is one of the ways you can do so, by spreading your investments across different sectors, geographies and asset classes. If one sector or asset isn’t performing well, other investments can balance out any potential loss.
However, it is important to note that diversification may not fully protect you from market risk and does not guarantee returns or eliminate potential for loss, so do your research carefully!Before making any investment decisions, it’s important you fully understand the risks involved. Do your research, consult the fund’s offering documents, or talk to a financial advisor to help you make the best choice.
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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
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