The level of risk and return of an ETF depends on the type of fund and what it invests in:
- Index ETFs – have similar risks to the underlying investments. For example, an ETF that follows an equity index has risks similar to stocks. An ETF that follows a fixed income index has risks similar to bonds. An index ETF may not achieve the same return as the index or sector it tracks. That's because the weightings of investments in the ETF are not exactly the same as those in the index, and fees and expenses lower the return.
- Commodity ETFs – tend to be higher risk because they are concentrated in one sector and the prices of commodities can go up and down a lot. Examples: oil and gas.
- Leveraged ETFs – are highly sensitive to market volatility. Leveraged ETFs typically aim to double or even triple the daily return of a market index. But you can't assume you will make those kinds of returns for periods longer than a day. As with any leveraged investment, your gains are multiplied – but so are your losses if the index turns the other way.
Returns are not guaranteed: There's no guarantee that you'll make money with an ETF. And you could lose money. No one can predict how the underlying investments will perform in the future. Learn more about the risks of ETFs.
5 other risks to consider
- Trading price of units or shares can vary – Units or shares may trade in the market at a premium or discount to their net asset value (NAV) because of market supply and demand.
- Concentration can lead to volatility – If an ETF is heavily invested in only a few investments or types of investments, it may be more volatile over short periods of time than a more broadly diversified ETF.
- You don’t own the securities – When you buy units or shares of an ETF, you don’t actually own the securities held by the fund — like you do when you buy a stock.
- There may not be an active market – Although an ETF may be listed on the Toronto Stock Exchange (TSX), there is no guarantee that investors will buy its units or shares. An active market may not develop or be sustained for the ETF.
- Trading can be banned – If a securities regulator or a stock exchange issues a cease trade order, the ETF may have to stop all trading of its units or shares. That means you can't buy or sell the ETF.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca