ETFs carry a number of risks. Before starting to invest in them, one should be well aware of these risks.
Volatility refers to the fluctuations of investments, which can vary. The more volatile an ETF, the higher the risk. Broadly speaking, shares are more volatile than bonds. The following graph shows the volatility of the MSCI World index (Net Total Return) during 2008’s financial crisis – an exceptionally difficult time for the global economy. From peak to trough, it fell 58%! Would you have the nerves to remain invested? If so, your investments would have recovered by 2013, going on to make gains. When investing, patience is a virtue.
Volatility during a financial crisis
Equity prices can drop significantly during crises
Past performance is not a reliable indicator of future performance. Source: VanEck, Bloomberg. Data as of 1/1/2000 - 30/6/2021.
2. Market risk
Market risk refers to the risk of the general price movements in a market, such as a stock market. All stocks, bonds or ETFs are influenced by the general market movements – if the whole market goes down, or up, your investment may react as well.
3. Concentration risk
Concentration risk often is underestimated by retail investors. It means that your portfolio’s volatility will increase if it’s invested in only a few stocks. Even if you invest in multiple stocks, you can suffer significant concentration risk if these stocks come from just a few sectors, countries, currencies or investment styles.