How Risky are ETFs?

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  • 08/21/2022

As a newsletter writer and as an investment advisor who advocates the use of exchange-traded funds (ETFs) as the best tools to get all types of asset-class exposure, I am often asked about the risks associated with such funds. Just how risky are ETFs, and what do you need to know about this risk?

The short answer is that ETFs generally offer more diversification than buying individual stocks. They also offer lower costs than owning mutual funds. So, the only real risk with ETFs is the risk that’s assumed whenever you invest in any equity, bond, commodity or any other asset class.

Of course, not all asset classes or indices are created equal when it comes to risk. There are many market sectors that are far more risky, historically, than others.

In today’s ETF University podcast, I go over many of the trends and circumstances that cause certain areas of the market to be riskier than others. I also show you how to control that risk with ETFs designed to help adjust for circumstances such as currency risk.

Now, if you haven’t checked out ETF University, or simply, then this is a perfect opportunity to do so. And, it is not just risk that you’ll learn about.

The following table shows all of our previous podcasts, along with their respective titles, so you can listen to the topics of greatest interest to you.

#1 11/7/14 Case Against Mutual Funds
#2 11/14/14 Choosing a Brokerage Firm
#3 11/24/14 Finding the Money
#4 11/26/14 Tips, Terms, Tools and Rules
#5 12/5/14 What ETFs Should You Buy?
#6 12/12/14 Navigating the ETF Landscape
#7 12/19/14 Pitfalls, Mistakes and Missed Cues
#8 12/23/14 Building Your ETF Portfolio
#9 12/31/14 10 Action Steps for Becoming a Better ETF Investor
#10 1/9/15 Last Year’s Market Winners and Losers
#11 1/16/15 The #1 Factor in Your Investing Success
#12 1/23/15 Innovations in International ETFs
#13 1/30/15 Strong US Dollar
#14 2/6/15 Opportunities to Invest Internationally
#15 2/13/15 The Power of the Roth IRA
#16 2/20/15 Who Needs Banks?

As you can see, we’ve covered a lot of different topics during the past 17 weeks, and I think investors of nearly every orientation (growth, income, trading, etc.) will find something here to learn about.

So, if you haven’t done so already, check out the ETF University podcast today!


International vs. Domestic ETFs in 2015

At the beginning of the year, I told Weekly ETF Report readers, as well as subscribers to my Successful ETF Investing newsletter, that I thought 2015 would be the year that international ETFs would outperform domestic ETFs.

So far, that prediction has proved prescient, as a widely held international ETF, the iShares MSCI EAFE Index (EFA), now is up 7.2% year to date.

Contrast that with the relatively meager gains of the benchmark domestic equity index ETF, the SPDR S&P 500 Index ETF (SPY), with its gain of just 2.8% year to date, and you can see that at least for the first two months of the year our thesis calling for international equities to outperform domestic ones has been validated.

Will this trend continue in the remaining 10 months of the year? I definitely think so, and one big reason why is due to the fact that the Federal Reserve has signaled that it will increase interest rates at some point this year. Whether a rate hike happens in June (unlikely) or in September (much more likely), we’re not quite sure. But compared to central banks around the world, the easy money here at home is coming to an end.

Consider that the European Central Bank just started its own version of quantitative easing, and that central banks in Japan, China, Sweden and several other places all are putting the pedal to the metal on easy-money policies.

This disparity between the Fed and the world’s other large central banks is reason enough to think the outperformance of international ETFs vs. domestic ETFs remains firmly on target for 2015.

Dirty Harry on Ketchup

“Nobody, I mean NOBODY puts ketchup on a hot dog.”

–“Dirty Harry,” in Sudden Impact

Although it is true that nobody should ever put ketchup on a hot dog, sometimes it’s true that doing things differently than everyone else will allow you to change the world. In fact, looking at the world differently, and doing things the way you “shouldn’t,” is what progress is all about. So, don’t put ketchup on that hot dog — but do look at the world through your own lens.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about smart-beta ETFs. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.