Passive investing and Exchange Trades Funds (ETFs) are all the rage. Increasingly, investors have come to the conclusion that active investing rarely beats market performance. However, as always when new products are becoming popular very quickly risks and unwanted side-effects are increasing as well. For the private investor especially it becomes trickier to select the optimal funds for his or her needs.
In general, ETFs and similar passive products are a good tool to construct a passive, market-performing strategy. However, the sheer number of new funds implies that many ETFs are covering the same index but also that a multitude of funds are now covering very narrow or exotic market segments, often resulting in high costs, illiquid markets and non-transparent investments. We have also found that funds missed their benchmark by a wider margin than in previous years. Other potential ETF risks relate to wide trading spreads and possible default risks of ETFs.
In order to answer these concerns we’ve published this new guide for private investors and wealth managers that takes an in-depth look at the following major ETF risks:
The tracking error – or how big is the risk of missing the benchmark?
The default risk – or how big is the risk that a fund can default?
The trading risk – or how big is the risk that you have to pay too large a spread?
Exotic ETFs – or how big is the risk that the underlying index or strategy leads to disaster?
A special case: currency ETFs – are they too risky for private investors?
Overall, this guide provides the private investor as well as the experienced wealth manager with valid guide lines to avoid many risks in the increasingly complex world of ETFs and index investing.