ETFs are considered low-risk investments because they are low-cost and contain a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to create a diversified portfolio. The biggest risk of ETFs is market risk. Like an investment fund or a fixed capital fund, ETFs are just an investment vehicle, an envelope for your underlying investment.
So, if you buy an S%26P 500 ETF and the S%26P 500 falls by 50%, it won't help you anything about how cheap, tax-efficient or transparent an ETF is. Market risk also belongs to the group of ETF risks and refers to the risk of general price movements in a market, such as a stock market. All stocks, bonds or ETFs are influenced by general market movements; if the entire market goes down or up, your investment can also react. Retail investors often underestimate concentration risk.
This means that your portfolio's volatility will increase if you invest in just a few stocks. Even if you invest in several stocks, you may run a significant concentration risk if these stocks come from a few sectors, countries, currencies, or investment styles. Securities lending is another often overlooked category of ETF risks. Some ETF managers lend the ETF's stocks or bonds to other parties.
These other parties could be hedge funds that speculate on the fall in the stock price. While securities lending generates benefits for you, the investor, there is also a small risk of loss if the borrowing party were to file for bankruptcy. In some cases, splitting up loans is often more advantageous for the issuer. Jolien Brouwer analyzes equity lending, a major risk factor for ETFs.