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.

Index Risk

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 ...

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