Like all investments, ETFs aren’t risk-free. Learn the main risks of ETF investing – and how investors manage them.
ETFs carry risks, but could be a low-cost way to invest because they spread your money across many assets. But like all investments, they carry risks, including market risk, tracking error, and liquidity risk. Understanding these risks before you invest is the best way to set realistic expectations.
Are ETFs safe to invest in?
Depending on the ETF, they are typically seen as lower-risk than picking individual stocks, mainly because they spread your money across many holdings rather than concentrating it in one company. They're also traded on regulated exchanges, which brings a level of transparency and oversight that adds to investor confidence. That said, ETFs are not risk-free, they remain subject to market movements, and a diversified fund can still lose value when markets fall broadly.
What are the main risks of ETF investing?
The main risks to be aware of include:
- Market risk: the value of your ETF can fall along with the broader market it's exposed to, regardless of how diversified it is.
- Tracking error: when an ETF doesn't perfectly match the performance of the index it follows, due to fees, timing, or fund structure.
- Liquidity risk: the risk that, in certain market conditions, it may be harder to buy or sell an ETF at the price you expect.
- Currency risk: if an ETF holds assets in a foreign currency, exchange rate movements can affect your returns even if the underlying assets perform well.
Your ETF portfolio is also subject to broader fluctuations in global financial markets, economic conditions, geopolitical events, and market sentiment can all affect the value of your investments. You can read more in our risk disclosure.
How can investors manage ETF risks?
Diversifying across different asset types, equities, bonds, and other ETF categories, is considered an effective way to manage risk, since the different types of ETFs respond differently to the same market conditions. Understanding your own risk tolerance and keeping a long-term investment horizon also helps you ride out short-term volatility rather than reacting to it. Choosing established, well-regulated funds adds a further layer of safety. For more on this approach, see spreading risk through diversification and our guide to building a diversified ETF portfolio. This is general education, not personalized investment advice.