It is important to understand that ETFs are not guaranteed products – just like any investment in the stock or bond market, your initial investment is subject to risks.

As there are many different types of ETFs, there are some that are riskier than others. If you invest in an ETF that holds securities in a currency other than your own (for example a Japanese equity ETF), your returns can also be affected by movements in the exchange rate (AUD vs JPY).  There are some ETFs that provide currency hedging to minimise this ‘currency risk’.  ETFs are designed to track an index, therefore they buy the same securities as that index and attempt to replicate the returns, minus the cost (fee) of the fund.  There is a risk that there can be a divergence between the return of the index, and the return of the fund.  However, it should be remembered that it is impossible for any investor to invest directly in an index.

Risk

Risk is an inherent part of investing. Every investment portfolio carries some degree of risk and by better understanding the types of investment risk, investors can manage portfolios’ risk/return balances through market cycles.

What is more, the elevated risk associated with higher volatility can present opportunities for investors aiming to enhance portfolio returns.

How ETFs can help manage risk

ETFs can help investors diversify across asset classes and risk exposures, customise active risk, and adjust expected portfolio volatility.

For example, using ETFs, investors can quickly and easily reduce exposure to equities in times of market volatility, at the same time increasing exposure to fixed income.

Making Sense of Currency Exposure


Risk considerations

ETFs are a simple and cost-effective way to gain exposure to different markets. The aim of ETFs is to offer investors returns based on the performance of the relevant underlying index. Using ETFs as building blocks, you may be able to spread the risk of individual companies, entire sectors or even whole countries suffering losses. However, they will not mitigate all market risk, and you can still lose some, or all of your investment should the value of the underlying shares decrease. Note that the risks you expose yourself to are different per fund. For example investing in an ETF with an international focus might expose you to currency risk and an emerging markets ETF is likely to expose you to less liquid and less efficient securities markets. Looking at fixed income ETFs, you have to bear in mind that the price of bonds will generally be affected by changing interest rates and credit spreads. The specific risks for each ETF be found in the prospectuses.

As ETFs are not risk free, before investing we recommend you:

  • Assess your investment objectives, risk tolerance and time horizon
  • Select investments to match these or consult an adviser to help you do this
  • Spend time understanding your investment choices before investing
  • Speak to a financial adviser

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