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Investing In ETF Securities

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The Risks Associated With Investing In ETF Securities

ETF SecuritiesExchange Traded Funds (ETFs), commonly referred to as ETFs or ETF securities, offer a wide range of investment options for investors looking to invest in stock markets around the world or to diversify their investment into asset classes beyond stocks.  ETF securities’ holdings (what they invest in), that provide ETF securities their valuation, can differ greatly amongst the many ETF securities, which can affect the risk and potential returns associated with investing in ETF securities.

Some ETF securities invest in similar financial instruments as mutual funds, such as stocks and bonds.  Other ETF securities offer investments in much riskier financial products that cannot be invested in via mutual funds, such as volatility futures.

While mutual fund prospectuses are relatively easy to read and understand, this is not always the case with ETF securities prospectuses, due to the complicated nature of their holdings and valuation methods.  It is very important that an investor considering investing in ETF securities read the prospectuses to gain a clear understanding of how the ETF securities derive their valuation and the risks associated  with holding particular ETF securities.

Some ETF securities, such as leveraged ETF securities, are not suitable for long term investment purposes, due to their leveraged exposure to a stock market sector or financial products, which leaves an investment portfolio exposed to the risk of excessive losses.

The potential for natural decay in the price of the ETF securities that invest in futures contracts, due to the nature of futures contracts investing, make ETF securities that invest in futures contracts risky for long term investment purposes.  If the commodity or index that the futures contract is based upon loses value, the losses in the corresponding futures based ETF securities may be much greater than the actual loss of value of the underlying commodity or index.

The Potential Rewards Associated With Investing In ETF Securities

The potential rewards associated with investing in ETF securities include the ability for long term investors to make targeted investments in stock market sectors around the world and in various financial products to diversify investments across a number of regions and asset classes.  ETF securities provide long term investors numerous investment options to make targeted investments.  For example, if an investor thinks that investing in gold is good long term investment, they can invest directly in physical gold or gold futures contracts via ETF securities, rather than buying a mutual fund that invests indirectly in gold producing or related companies.

ETF securities provide an easy way for long term investors to diversify their investment portfolio across a number stock market sectors, regions, and asset classes.  Targeted investments can be made via ETF securities in specific stock market segments, such as wind energy, or specific countries, such as Brazil.  Additionally, ETF securities are available for a number of assets classes, including:  stocks, bonds, commodities, and real estate.

ETF securities generally have lower maintenance fees than mutual funds, due to the reduced cost structure associated with ETF securities, which make ETF securities attractive to long term investors looking to keep more of their profits over the life of their investments.

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