What risks are involved in trading ETFs?
Although ETFs are in general simple, transparent and low cost there are a number of features you should consider before investing.
ETFs are traded like shares and may not be for everyone. They closely track the performance of an index and as such their value can go down as well as up and you may get back less than you invested. If you are in any doubt as to their suitability, please seek independent financial advice.
Counterparty risk - while most ETFs do not use leverage and achieve their objectives by purchasing a diversified pool of assets, for example the individual stocks that make up the FTSE 100, some achieve their objectives through the use of derivatives, typically swaps, which carry counterparty risk. If the counterparty (issuer of the derivatives) does not pay the sums due, the investor will see a reduced return regardless of the performance of the underlying assets.
Leveraged and Short ETFs - products that offer leverage (where gains or losses can be magnified), or that are designed to perform inversely to their underlying index or benchmark, are highly complex financial instruments that carry significant risks. Please ensure you understand these before making an investment decision.
Taxation - you should be aware that the majority of ETFs are Offshore Funds and as such specific taxation rules apply for investors subject or potentially subject to UK tax.
You can also read more on the benefits and risks of ETFs.
If this is the first time you have traded in an ETF you will be asked to complete an Appropriateness Assessment questionnaire before you are able to place your investment instruction.