Although ETFs are widely used and convenient investment instruments for investors, like any investment product, they also involve various risks. Therefore, before investing, it is important to understand not only their advantages but also the potential risks they carry.

Main advantages of ETFs

• Accessibility

ETFs are tradable on the stock exchange like stocks, making them accessible to a broad range of investors.

• Diversification

With an ETF, in a single transaction, the investment in a diversified basket of securities replicating the selected index is immediate. 

• Management fees

They are generally lower than those of traditional funds. 

• Transparency

ETFs replicate the performance of market indices whose composition is known.

• Wide selection

There are a large number of ETFs listed in Europe, allowing exposure to well-known global equity indices (such as the MSCI World), specific regional indices (CAC 40, Eurostoxx 50, S&P 500), or investment in sectoral or thematic ETFs (such as the "Smart Cities" indices) or those incorporating ESG criteria.

Like any investment instrument, ETFs also include risks.

• Capital loss risk

When investing in an ETF, the investor bears the risk of capital loss. This means that the value of the investment may decline, and the investor may not fully recover the amount initially invested.

• Replication risk

An ETF is designed to track a selected index as accurately as possible. However, in some cases, this objective may not be fully achieved. Unexpected events may occur in the underlying markets and impact the index calculation and the fund's operational replication.

• Volatility risk

The ETF is exposed to price fluctuations in the markets represented in the index. Therefore, the value of an ETF can change rapidly and unpredictably and may experience significant fluctuations, both upwards and downwards.

• Underlying risk

An ETF's index may hold securities – the index's underlying assets – that are riskier or more volatile than others. For example, ETFs exposed to Emerging Markets carry a higher potential loss risk than those investing in Developed Markets. 

• Counterparty risk

Investors are exposed to risks arising from the use of a performance swap or securities lending negotiated over-the-counter with respective counterparties. In accordance with UCITS regulations, counterparty exposure cannot exceed 10% of the fund's total assets. 

• Currency risk

An ETF may be exposed to currency risk if it is denominated in a currency different from that of the components of the index it replicates. Exchange rate fluctuations can therefore have a positive or negative impact on performance.

• Concentration risk

Thematic ETF indices select stocks or bonds within a broad universe of securities representative of an entire market. When selection rules are stricter, the index may be more concentrated. The risk is then spread over a smaller number of securities than an index representing a broader universe of securities. 

• Liquidity risk

There is a risk related to the markets to which the ETF is exposed. The prices and value of investments are linked to the liquidity risk of the ETF index components. Investments can fluctuate both upwards and downwards. Additionally, in the ETF's secondary market, liquidity is provided by market makers operating on the exchanges where the ETFs are listed.

How to understand the risk level of an ETF?

Like any fund (or UCITS), an ETF has a risk indicator. 

The synthetic risk indicator corresponds to the fund's risk level; it is included in the Key Information Document (KID) and can change over time. It is rated on a scale from 1 to 7, where:

• 1 = relatively low risk
• 7 = high risk

However, it is important to understand that even the lowest risk category does not mean that the investment is entirely free of risk.

ETFs can be an effective tool for diversifying an investment portfolio, accessing different markets or sectors, and broadening an investment strategy. However, their accessibility and relatively simple structure do not eliminate investment risks. Therefore, when selecting an ETF, it is essential to assess not only its advantages but also all the risks that may affect investment outcomes.