Top three risks for ETFs
- You don't know what you'll make for sure: No matter what the historical data says, there's no guarantee that you'll make money with an ETF at any given point in time. No one can predict exactly how a market or sector will perform in the future. You could even lose money.
- You may give up some growth: You will only do as well as the market index or sector the ETF follows. A good mutual fund with active management may outperform an ETF. Again, there's no guarantee.
- You may lose money: Some sectors, such as commodities like gold or oil, are naturally more volatile than others. If the sector your ETF follows performs poorly and you have to sell, you could lose money.
Two things that can affect the level of risk for ETFs
1. The type of ETF
- When ETFs follow equity indexes, they have risks similar to stocks.
- When ETFs track fixed income indexes, they have risks similar to bonds.
- ETFs that follow international indexes have different risks than those based in Canada.
- Investments in commodities such as oil and gas may be higher risk because their prices tend to go up and down a lot.
2. Your approach to trading
- Many people buy and hold ETFs for the long term. They don't try to outguess the market by watching for price changes.
- Some experts trade more actively. For instance, they try to take advantage of small price movements in ETFs from one minute to the next to sell for a profit or borrow to buy. Of course, if they're wrong, they may lose money. Also, trading costs are higher with this kind of active trading.
Remember: To a certain extent, you control the risk of your ETFs
Be sure to adjust your investment choices to fit your financial goals, your timelines and your tolerance for risk.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
