Risks ETF Investment Funds May Face in the Market
Key Takeaways
- Market risk is inevitable when investing, and with ETF investment funds this is even more apparent. But is there any solution to prevent and hedge against it? Let's refer to the following...
Market risk is inevitable when investing, and with ETF investment funds this is even more apparent. But is there any solution to prevent and hedge against it? Let's refer to the following article right away to find the answer.
Market risks of ETF investment funds
The market risk of ETF investment funds is the risk arising from the instability of the market and the economy. This can be simply understood as the rate at which the market and the economy decline. This causes individual investments to face risk and lose profit value.
Common market risks that ETF investment funds may encounter for investors to avoid
We could clearly see this in the 2008 financial crisis. In that year, almost every stock lost its issued value. This happened even though the companies did not affect or carry out any other actions. This situation occurred and no one, absolutely no one, could prevent or hedge against it.
Financial crisis is one factor among countless issues that cause ETF investment funds to face risks. These include impacts from policies and competition from other financial sectors. These factors, to some extent, create instability and uncertainty that make investors hesitate.
Although compared to other investment channels, ETF investment funds still have a lower risk rate (only 1%). But this reflects that nothing is absolute. And at any time, the financial market can create risks for ETF investment funds.
Identifying types of market risk
For investment funds, there are many components that lead to investment risk. Among them, the most common are risks from equity capital, interest rates, credit… and, on a broader scale, inflation, society, or country. Some types of investment may also involve market risk. For ETF investment funds, we have the following common ongoing risks:
Risk due to the equity capital of ETF investment funds
Equity capital applies to an investment category in the market. This creates a certain amount of risk when the market share value changes. Especially when some investments become less valuable because the investor wants to sell.
This type of risk occurs at twice the rate in the stock market, but remains unchanged for gold.
ETFs are heavily affected by investors, because people are a factor that can easily create risk
The nature of this type of risk is that the value of ETF investment funds can fluctuate. This affects the share value of investors. Besides that, the value of ETF investment funds can also fluctuate, causing the market value to be affected.
In addition, the value of the gold market in investment funds is also affected by investment portfolios. And because this is carried out by the capital investor, their capability also partly affects market risk.
Applicable interest rate risk
Interest rate risk applies to investments such as government or corporate bonds. When interest rates rise due to the FED, existing bonds will become less valuable.
Credit interest rates are a financial issue that strongly impacts the market, especially with FED decisions.
This risk has a direct relationship with the liquidity of bond funds and ETF investment funds. Therefore, analysts believe that credit risk will affect ETF investment funds.
In reality, there are still not many investment funds in Vietnam, and current interest rates are also stable. Therefore, this risk has little chance of existing in Vietnam's financial market. Its strongest presence is in the international financial market. Therefore, investors should not be overly concerned about the current fluctuations of the FED.
Inflation risk
True to its name, inflation risk is a situation in which currency and asset values lose value. This situation makes investment unstable, with many potential risks and dangers.
Inflation is a serious issue that can easily cause the entire financial system to collapse, not just gold bullion.
Normally, this situation occurs when a country faces a serious financial crisis. This directly impacts and disrupts the domestic financial system.
Although the issues it causes are relatively serious, this does not mean they will appear in our country's financial system. Because at present, inflation is still under control and nothing too serious has happened.
Social risk of ETF investment funds
One of the risks easily encountered by investment funds is social issues. War, natural disasters, epidemics, and terrorism all partly directly affect the financial market.
Social issues are inevitable and can easily directly affect ETF funds.
Similarly, national risks reflect the impact countries have on one another. A recent typical example is the US–China trade war. This event caused many countries and many policies to be implemented and the operating cycle to shift.
In the current context, these issues are real and can easily shake ETF investment funds. Therefore, investors also need to observe carefully in order to invest more effectively.
In general, there are many risks that investment funds may face. However, these can be avoided if investors observe well. Thereby, they can prevent and partly avoid the risks when investing in ETF investment funds.
