What risks ETFs carry
Index funds are broadly diversified but not risk-free. This overview describes the main types of risk; which of them apply to a fund is stated in the issuer’s key information document and prospectus.
Market risk
An index fund follows its market up and down. Broad equity indices have at times fallen by more than 40 % in the past and sometimes took years to recover.
Concentration risk
Even broad indices can be dominated by a few companies, sectors or countries. Combining several funds often means holding the same securities more than once, e.g. large US technology stocks in both an S&P 500 and a Nasdaq-100 ETF.
Currency risk
If a fund holds securities in other currencies, exchange rates affect performance in euros – regardless of the currency in which the ETF trades. Currency-hedged share classes reduce this risk but incur hedging costs.
Interest rate risk
Bond ETFs lose value when market interest rates rise – the more so the longer the bonds’ maturities. The default risk of the issuers comes on top.
Liquidity and trading risk
An ETF’s market price can deviate from the value of its constituents, especially in less liquid markets or outside the trading hours of the home exchanges. The bid-ask spread is a cost when buying and selling.
Counterparty risk: swaps and securities lending
Synthetic ETFs replicate the index via a swap agreement with a bank; physical ETFs sometimes lend securities against collateral. If the counterparty defaults, the loss depends on the amount and quality of the collateral. UCITS rules limit counterparty risk from derivatives but do not eliminate it.
Issuer and fund risk
The assets of a UCITS fund are held by a depositary, separate from the management company’s assets. Issuers can, however, close or merge funds; the fund is then liquidated or converted, which may have tax consequences depending on the country.
Deviation from the index
Costs, taxes, sampling and cash holdings mean that a fund never earns exactly the index return (tracking difference). The deviation can vary from year to year.
Tax and regulatory risks
Tax rules for funds and investors can change, as can double tax treaties and the treatment of swaps. How income is taxed depends on your country of residence.
How the portfolio analysis measures concentration
The portfolio analysis calculates the Herfindahl-Hirschman Index (HHI) from the ten largest recorded securities in your portfolio: their shares are normalised to 100 %, squared and added up. The result ranges from just over 1,000 (ten equal holdings) to 10,000 (a single holding).
| Concentration | HHI range |
|---|---|
| Low | < 1,500 |
| Moderate | 1,500 – 2,499 |
| High | 2,500 – 3,999 |
| Very High | ≥ 4,000 |
The thresholds follow values commonly used in competition analysis; there is no generally accepted standard for portfolios. Because only the ten largest recorded holdings are included, the value is a rough guide and depends on the available data.