ETFs: how to spot the hidden risks

When buying exchange-traded funds (ETFs), there are two main risks you should watch out for. Paul Amery explains what they are and how you can spot the hidden pitfalls.

There are two main levels of risk you're exposed to in an exchange-traded fund (ETF): one visible, one less so. As Europe's financial strains intensify, you should pay attention to both.

The first type of risk relates to the make-up of the index your ETF tracks. Take ETFs investing in European government bonds. Your exposure to Europe's perceived problem countries a category that, with Italy and Spain now in the firing line, seems to be gaining members from one week to the next depends very much on how the underlying index is structured. For example, iShares' 1-3 year eurozone bond ETF (LSE: IBGS) has over 40% investment exposure to Italy, while Lyxor's ETF EuroMTS 1-3 year (Paris: MTA) has a few per cent in Greek bonds.

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Paul Amery

Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.