ETF essentials · 2 minute read
Risk and volatility: how much could an ETF fall?
The short answer
Every investment carries risk. An ETF can lose value, sometimes sharply. Diversification may reduce some risks, but it cannot protect you from a fall in the market as a whole.
Why it matters
Different ETFs carry different risks. A broad equity ETF, a government bond ETF, a technology ETF and an emerging-market ETF should not be expected to behave in the same way.
The main sources of risk can include:
- Market risk: the value of the overall market falls
- Concentration risk: a small number of holdings dominate the ETF
- Currency risk: exchange rates affect the value for a euro-based investor
- Interest-rate risk: bond prices can fall when interest rates rise
- Credit risk: a bond issuer may struggle to repay its debt
- Liquidity risk: some investments may be harder to buy or sell
A simple example
If an equity ETF falls by 20%, an investment of €1,000 would be worth approximately €800, before considering costs. It would need to rise by 25% to return to €1,000. Recovery is not guaranteed.
This is why the time period and your ability to tolerate losses matter. A past return does not tell you how much an ETF could fall in the future.
What to check
- What assets does the ETF hold?
- How concentrated is it?
- How has it behaved during previous market falls?
- Is currency exposure relevant?
- Could you remain invested during a substantial decline?
Key term explained
Volatility describes how much and how quickly an investment’s value moves up and down. High volatility means larger price movements, not necessarily higher long-term returns.
Risk labels are only a starting point. Understand what is driving the risk.