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What risks are associated with ETFs?

Reading Time: 2 minutes

In short, lots. Just like there is with any investment that you may have.

We all agree, ETFs are easy, accessible and offer you flexibility and liquidity, all for a low cost cost, but yes there are certainly risks.

Keeping it simple, let’s look at some of those risks. The risks, in no particular order, that may affect your investment include, but are not limited to:

Market risk

Markets go up. Markets go down. ETFs are tradeable on these markets and will go up and down like markets do.

This means that unexpected conditions (e.g. economic, technological or political) can have impact on the returns of all investments including ETFs.

Liquidity risk

There are two levels of liquidity to think about with ETFs.

Firstly, although the ETF is quoted on a stock exchange there are no assurances that there will be a liquid market for that ETF.

We have put in place market making arrangements to assist in maintaining liquidity for our active ETFs. The arrangements also determine certain circumstances where market making may be suspended (such as operational disruptions, market disruptions or unusual conditions).

The second aspect of liquidity is the risk that one or more securities held by the ETF may be difficult to sell, preventing the ETF to price accurately. This may be due to factors specific to the ETFs portfolio or even to the market conditions of the day.

Tax risk

Tax law is amazingly complex and can be changed by the Australian Government at any time. As your personal circumstances differ to mine, we strongly recommend you get professional tax advice relating to any investment, including using eInvest active ETFs in your investment portfolio.

iNAV risk

As with any ETF, it is possible that the trading price seen on the exchange page may differ from the Net Asset Value of the ETF. Whilst we try our best in all circumstances to get as accurate as possible, the iNAV published for our funds are indicative only.

Trading risk

In certain circumstances, the exchange may suspend trading in an ETF and in that event you would not be able to buy or sell your investment.

There may be other occasions where the Responsible Entity may suspend the application and redemption process, such as around the end of a distribution period or where other factors prevent the accurate calculation of Unit prices, such as the suspension or restriction of trading in securities that form part of the Index.

Concentration risk

When investments are concentrated in a smaller number of securities than the broader market index, the price of the ETF may be more volatile than the return of the benchmark. All our active ETFs have investment guidelines and limits which to manage this risk by ensuring a good level diversification in our funds.

Company or security-specific risk

Similar to market risk, companies can announce good and bad news in regards to their operational activities. This means that the value of a specific security in which the ETF invests can move up and down accordingly and therefore may impact the ETF.

For more detail, please see the relevant Product Disclosure Statement (PDS) for the active ETF you are interested in. The PDS will outline all the general and specific risks associated with the fund. Otherwise, ask your financial adviser or broker for more information. I’m sure they’ll be happy to help you.