Five risks to know when investing in ETFs (2024)

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Past performance is not a guarantee of future results.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional/financial consultant before making any investment decisions.

The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.

The Industry Classification Benchmark (ICB) is a system for assigning all public companies to appropriate subsectors of specific industries.

The S&P 500® Index is a broad-based, market-capitalization-weighted index of 500 of the largest and most widely held stocks in the United States.

The technology select sector index is a modified capitalization-weighted index representing the performance of technology companies that are components of the S&P 500 Index.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

Invesco does not offer tax advice. Investors should consult their own tax professionals for information regarding their own tax situations.

Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability react to market changes and the potential to outperform a stated benchmark. Since ordinary brokerage commissions apply for each ETF buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs can be traded throughout the day, whereas, mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs. Typically they are still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with their financial professional regarding their situation before investing.

This content should not be construed as an endorsem*nt for or recommendation to invest in Microsoft Corp or Apple Inc. Neither Microsoft Corp nor Apple Inc are affiliated with Invesco. Only 2 of 101 underlying Invesco QQQ ETF fund holdings are featured. Holdings are subject to change and are not buy/sell recommendations. See invesco.com/qqq for current holdings. As of 2/15/2024, Microsoft Corp and Apple Inc made up 8.85% and 8.33% respectively, of Invesco QQQ ETF.

Five risks to know when investing in ETFs (2024)

FAQs

What is the risk of investing in ETFs? ›

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment.

What is the hidden risk of ETF? ›

If you buy into a leveraged ETF you are amplifying how much you can lose if the investment crashes. You can also easily mess up your asset allocation with each additional trade that you make, thus increasing your overall market risk.

What is the downside to an ETF? ›

The greatest risk for investors is market risk. If the underlying index that an ETF tracks drops in value by 30% due to unfavorable market price movements, the value of the ETF will drop as well.

How do I know if my ETF is safe? ›

ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.

What is the risk of cash to ETF? ›

Despite their appealing returns, these funds carry what is known as counterparty risk—the risk that a bank could fail to fulfill its obligations to investors. In other words, the safety of Cash ETFs is equal to the reliability of the banks which hold your money.

Why are ETFs considered to be low risk investments? ›

Thanks to their lower costs and ability to diversify a portfolio, ETFs are considered low-risk investments. That's not to say ETFs are not risk-free. They can be tax-inefficient, generate high trading fees, and have low liquidity.

What is the ETF loophole? ›

That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy. The ETF tax loophole works only on capital gains, though.

Which is riskier stocks or ETFs? ›

Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in.

How do you measure risk of an ETF? ›

The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance. Alpha measures the difference between a fund's actual returns and its expected performance, given its level of risk (as measured by beta). A positive alpha figure indicates the fund has performed better than its beta would predict.

Can an ETF go to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

What happens if an ETF goes bust? ›

Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.

What is not recommended when trading ETFs? ›

Buying high and selling low

At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business.

What is the single biggest risk in ETF? ›

The single biggest risk in ETFs is market risk.

What is the riskiest ETF? ›

7 risky leveraged ETFs to watch:
  • ProShares UltraPro QQQ (TQQQ)
  • ProShares Ultra QQQ (QLD)
  • Direxion Daily S&P 500 Bull 3x Shares (SPXL)
  • Direxion Daily S&P 500 Bull 2x Shares (SPUU)
  • Amplify BlackSwan Growth & Treasury Core ETF (SWAN)
  • WisdomTree U.S. Efficient Core Fund (NTSX)
Jul 7, 2022

Which is the safest ETF? ›

Minimizing risk with broad-market funds
  • SPDR S&P 500 ETF Trust (SPY 0.66%)
  • Vanguard S&P 500 ETF (VOO 0.68%)
  • iShares Core S&P 500 ETF (IVV 0.66%)
  • Vanguard Total Stock Market ETF (VTI 0.72%)
  • Schwab U.S. Broad Market ETF (SCHB 0.62%)
  • iShares Core S&P Total U.S. Stock Market ETF (ITOT 0.71%)
Apr 26, 2024

Is an ETF safer than a stock? ›

Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.

Is an ETF riskier than a mutual fund? ›

In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.

Can ETFs fail? ›

Like any business, exchange-traded funds (ETFs) can close up shop. But with so much riding on your investments, you want to be sure your ETFs are as sound as possible.

Are ETFs good for beginners? ›

The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.

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