Risks may include market volatility and the impact of fees on returns. Investors should carefully consider these factors and assess their risk tolerance before investing in index funds.
Investors should be aware that, like any other form of investment in the equity and bond markets, index funds are not guaranteed products but are subject to risk of loss. In the case of investment in a fund with securities not listed in the investor’s base currency (e.g., in an ETF for Japanese equities), fund returns may be affected by exchange rate fluctuations. Some funds therefore also hedge currencies to reduce this risk. There is the risk that fund returns may deviate from the return determined for the index on account of costs, cash holdings, additional returns, or other factors. So it is usually more efficient for the investor to invest in an ETF than directly in the index’s stocks.