Understanding the Risk of Investing with ETFs and Why They Still Beat Mutual Funds
Jeffrey Feldman and Andrew Hyman
Risks of Investing with ETFs
Despite their advantages, exchange traded funds (ETFs) are not risk free. No investment is. However, understanding the risks that are particular to ETFs helps investors prepare for unforeseen events and build their portfolios.
ETFs are designed to match an index and are passive investments.1 In contrast to a mutual fund, they are not actively managed, which provides many benefits, as seen earlier. However, because an ETF is not actively managed, it will not sell a security if the security’s issuer is in financial trouble—unless the security is removed from the index. This means that the fund ...