Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management (2024)

FAQs

Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management? ›

In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges. Their value can fluctuate throughout the day in response to market conditions. This means that if the market takes a dip, the value of your ETF could drop quickly, and you could experience significant losses.

Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Within equity mutual funds, small-cap funds are considered to be the riskiest. Small-cap funds invest in companies with a small market capitalization, which means they have a lower market share and are less established than larger companies.

ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.

Key Takeaways. ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.

The single biggest risk in ETFs is market risk.

Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.

Like any business, even low-cost ETFs need to generate revenue to cover their costs. Like any business, even low-cost ETFs need to generate revenue to cover their costs. Plenty of ETFs fail to garner the assets necessary to cover these costs and, consequently, ETF closures happen regularly.

ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.

What is the riskiest type of fund? ›

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.

The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.

If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.

While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.

No investment is risk-free and while mutual funds are generally low-risk because they invest in low-risk securities, they are not completely risk-free.

A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose. Downside risk measures are considered one-sided tests since the profit potential is not considered.

Investing in ETFs or mutual funds can be less risky than investing in individual securities. You can complement the ETFs or mutual funds in your portfolio with specific stocks and bonds.