Furthermore, since ETFs consist of various asset classes, investors can add more safety by adding safe-haven assets to an ETF portfolio. These assets can include bond ETFs or commodities like gold ETFs, which may help shield losses when the stock market experiences a downturn.
Of course, not all ETFs are deemed “safe.” Certain ETFs like leveraged ETFs carry a certain degree of risk since their returns can generate two or three times the index it tracks.
Conversely, this can work in the opposite direction when the index it tracks starts to fall. This would mean that the losses an investor experiences in leveraged ETFs will increase by two or three times, depending on the fund.
Leveraged ETFs utilize debt in order to increase the amount invested in the underlying assets. As such, the goal is to use leverage in order to generate amplified returns.
For example, if an index gains 5 percent, then a leveraged ETF tracking that index with triple the leverage would equate to a 15 percent gain. Unfortunately, when the index experiences a loss of 10 percent, that same ETF with triple leverage would mean a 30 percent loss.
Because of their higher risk, leveraged ETFs should only be used by more advanced investors who are using an intraday trading strategy.
For more educational information on ETFs, click here for Education Central.