Risks of ETFs

The level of risk and return of a specific ETF depends on the type of fund and what it invests in.

4 risks to consider

  1. Trading price of units or shares can vary – Units or shares may tradeTrade The process where one person or party buys an investment from another.+ read full definition in the market at a premium or discountDiscount When something sells for less than its normal price.+ read full definition to their net asset value (NAV)Net asset value (NAV) The amount that a single mutual fund unit is worth in dollars. It is based on the value of the assets of the fund, less the fees, expenses and taxes, divided by the number of units in the fund.+ read full definition because of market supply and demand. The premiums and discounts for specific ETFs vary, depending on the type of the ETF and time period.
  2. Concentration can lead to volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition 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.
  3. There may not be an active market – Although an ETF may be listed on an exchange, there is no guarantee that investors will buy its units or shares – you may not be able to sell your ETF when you want to. An active market may not develop or be sustained for the ETF.
  4. Some have no benchmarkBenchmark A yardstick that you can use to measure the performance of an investment. Example: a stock market index may be a benchmark you can use to compare how well your own stocks are doing.+ read full definition Active ETFs, for example, may not be designed to track an indexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition so it’s hard to compare performance over time.

Each type of ETF has its own set of risks. Learn more about the risks of index ETFs, actively managed ETFs, leveraged ETFs, and specialty ETFs.

There’s no guarantee that you’ll make money with an ETF. And you could lose money. ETF performance fluctuates and is not predictable. Learn more about the risks of ETFs.

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Before you investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition, read the ETF’s prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition or its summary disclosure document to understand its investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition objective, investment strategies, risks, fees and historical performance. You can find these documents on the ETF manager’s website.

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