ETFs may help you manage investment risk since they simplify the process of effective
asset allocation
and
diversification.
But that doesn't mean that they are always low-risk investments.
Because ETFs — like
index mutual funds
— are passively managed, the
risk
associated with a particular ETF corresponds closely to the risk of the asset subclass the fund is tracking. So, for example, an
emerging-market
stock ETF would most likely be more
volatile
— and higher risk — than a long-term government bond ETF. You should also be aware that some ETFs are more thinly traded than others, which could make it difficult to sell at the price you want, especially in a market downturn, or to sell short if that's what you are trying to do.
An ETF will perform well when the
index
it tracks is making gains, but it will perform poorly when that index is falling. An actively managed mutual fund manager, on the other hand, can tailor portfolio holdings to outperform the fund's benchmark in a down market. That's why ETFs may be less attractive to investors in
bear markets
than they are in
bull markets.
