ETF Risks

Please find below, for information purposes only, a non-exhaustive list of the main risks to which investors may be exposed.

The Amundi ETF team recommends that, prior to making any investment, potential investors read the Key Investor Information Document (KIID), the fund prospectus and the description of the main risks to which investors in ETFs are exposed.

General risks

 

Risk of capital loss

Investors are advised that they may incur unquantifiable capital losses, as investments are subject to normal market fluctuations and the risks inherent in any investment in transferable securities. The initial investment is not guaranteed in any way. Only investors who can afford to lose their investment should invest in ETFs.

 

Factors that may influence the Fund’s ability to replicate the performance of its benchmark

The Fund’s ability to replicate the performance of its benchmark may particularly be affected by the following factors:

  • re-weightings of the index replicated by the Fund may particularly result in transaction and/or friction costs;
  • the existence of market taxes;
  • and/or due to minor valuation differences not likely to cause a suspension of the calculation of the Fund’s net asset value. These differences may be due to the temporary unavailability of certain securities comprising the benchmark or exceptional circumstances that would have the effect of causing distortions in the weightings of the benchmark, and particularly in case of suspension or temporary interruption of the listing of the securities comprising the benchmark.

 

Risk that the ETF may not achieve its investment objective in full

There is no guarantee that the ETF will achieve its investment objective. In practice, no financial instrument is able to replicate its benchmark index exactly, immediately and continuously:

  • because reweightings in the benchmark index replicated by the ETF may give rise to transaction fees and/or friction costs;
  • on account of the temporary unavailability of certain stocks included in the benchmark index, or owing to exceptional circumstances that may distort the weightings of the benchmark index, especially if the listing of the stocks included in the benchmark index is suspended or temporarily interrupted.

 

Counterparty risk related to the chosen synthetic replication method

In order to achieve its management objective, the Fund will use financial futures (particularly total return swaps) traded over the counter with a credit institution. The Fund will be exposed to the counterparty risk resulting from the use of financial futures entered into with a credit institution. The Fund is therefore exposed to the risk that this credit institution will not be able to honour its commitments with respect to these instruments. The failure of the swap’s counterparty (or any other issuer) may cause a decline in the net asset value of the Fund. However, in accordance with the regulations in force, the counterparty risk arising from the use of financial futures will be limited at all times to 10% of the net assets of the Fund per counterparty.

 

Liquidity risk on a listing market

The Fund’s market price is likely to deviate from its indicative net asset value. The liquidity of the Fund’s units on a listing market may be affected by any suspension that could be due to, particularly but not only:

  • a suspension or termination of the calculation of the benchmark by the supplier of the index,
  • a suspension of the market(s) of the underlyings of the benchmark,
  • the impossibility for a considered listing market to obtain or calculate the indicative net asset value of the Fund,
  • an infraction by a market maker of the rules applicable on a considered listing market, 
  • a failure in the systems, particularly IT or electronic systems, of a considered listing market,
  • any other event that prevents the calculation of the indicative net asset value of the Fund or the trading of units of the Fund.

 

Operational risk

This is the risk of losses resulting from the inadequacy or failure of internal processes, individuals, or systems, or from external events.

Specific risks ETFs for Bond ETFs

 

Interest rate risk

This is the risk of a variation in prices of fixed income instruments resulting from variations in interest rates. It is measured by sensitivity. In periods of interest rate increases (positive sensitivity) or decreases (negative sensitivity), the net asset value may fluctuate significantly.

 

Credit risk

This is the risk of a downgrading to the credit rating of a private issuer or the risk of its default. Depending on whether the fund is the buyer or seller, the decrease (in the case of a purchase transaction) or increase (in the case of a sale transaction) in the value of the debt securities to which the fund is exposed may result in a fall in the net asset value.

 

Risk linked to inverse performance in the case of short bond ETFs

ETFs are 100% exposed to their benchmark index and are, by extension, also 100% exposed to market risks linked to movements in the stocks comprising their benchmark index. In particular, investors are exposed to upward movements in components of the benchmark index, which will have a negative impact on the net asset value. Fluctuations in the fixed income markets may lead to substantial variations in the net asset values, which may have a negative impact on the ETF's NAV. The ETF's net asset value may fall significantly as a result of the ETF being 100% exposed to fixed income risk. The ETF thus carries a high level of fixed income risk.
The inverse performance effect is applied daily. The performance of the short index over a period exceeding one day may therefore differ by a factor of -1 from the performance of the long index over the same period (see example below).

 

 

This example is deliberately simplified and does not take into account the cost of the short sale scaled to one day on the benchmark’s basket (costs measured by the “repo” variable). This illustrative and theoretical example does not in any way predict future scenarios and does not guarantee future returns.

 

Risk linked to the use of "speculative" (high yield) debt securities in the case of High Dividend ETFs

Such ETFs may be considered speculative and are especially designed for investors who are aware of the risks inherent in investments in securities with a low rating or no rating at all.
The use of high-yield securities thus exposes the ETF to the risk of sharper declines in the net asset value.

Specific risks for Equity ETFs

 

Equity risk

Such ETFs are 100% exposed to their benchmark, they are, by extension, also 100% exposed to market risks linked to movements in the stocks comprising their benchmark index. Fluctuations in equity markets may lead to substantial variations in net asset values, which may have a negative impact on the ETF's net asset value. The ETF's net asset value may fall significantly as a result of the fund being 100% exposed to equity risk. The ETF thus carries a high level of equity risk.

 

Risk linked to inverse performance in the case of short equity ETFs

Such ETFs are 100% exposed to their benchmark, they are, by extension, also 100% exposed to market risks linked to movements in the stocks comprising their benchmark. In particular, investors are exposed to upward movements in components of the benchmark index, which will have a negative impact on the net asset value. Fluctuations in the equity markets may lead to substantial variations in the net asset values, which may have a negative impact on the ETF's net asset value. The ETF's net asset value may fall significantly as a result of the ETF being 100% exposed to equity risk. The ETF thus carries a high level of equity risk.
The inverse performance effect is applied daily. The performance of the short index over a period exceeding one day may therefore differ by a factor by -1 from the performance of the long index over the same period (see example below).

 

 

This example is deliberately simplified and does not take into account the cost of the short sale scaled to one day on the benchmark’s basket (costs measured by the “repo” variable).This illustrative and theoretical example does not in any way predict future scenarios and does not guarantee future returns.

 

Risk linked to overexposure in the case of leveraged equity ETFs

Owing to the use of leverage (double exposure) by the benchmark index, investors are doubly exposed to upward and downward movements in the stocks comprising the benchmark index. Investors are therefore up to 200% exposed to risks to the benchmark index. Fluctuations in the equity markets may lead to substantial variations in the net asset values, which may have a negative impact on the ETF's net asset value. For example, if the benchmark index falls by 1%, the ETF's net asset value will fall by 2%. The ETF's net asset value may fall significantly as a result of the amplification of the ETF's exposure to equity risk.
The performance effect applies daily. The performance of the leveraged index over a period exceeding one day may therefore differ by a factor of 2 from the performance of the unleveraged index over the same period (see example below).

 

 

This example is deliberately simplified and does not take into account the financing costs for doubling the exposure (leverage costs).This illustrative and theoretical example does not in any way predict future scenarios and does not guarantee future returns.

 

Sector risk in the case of Sector ETFs

Such ETFs are exposed to a specific sector, offering less diversification than classic indices. Investors are therefore exposed to the specific developments in, and features of, this sector.

 

Risk linked to small cap companies in the case of Small or Mid-Cap ETFs

Such ETFs are exposed to small cap companies. Only a limited volume of small cap stocks are traded on the stock markets, meaning that any market movements - whether rising or falling - are more pronounced and more abrupt than for large caps. The ETF's net asset value may therefore behave in a similar manner, falling sharply and significantly.

 

Risk associated with value stocks

Value stocks generally have a defensive profile and fluctuate less than the market as a whole. In practice they are often - but not always - mature companies that present little uncertainty and pay dividends to their shareholders, which reduces their overall risk. Furthermore, value stocks present a specific risk decorrelated from other market factors. Finally, the reference strategy index may be less diversified at the sector and/or geographical level than a so-called classic index.

 

Model risk

The process of constructing the strategy index is based on the development of a systematic model using historical market data. There is a risk that the model is not efficient, and there is no guarantee that past market situations will occur again in the future.

Specific risks for Commodity ETFs

 

Risk linked to a commodity futures index

Since the benchmark index is composed of commodity futures, the ETF is exposed to the same risks as those linked to the use or trading of forward financial instruments (and thus, in particular, the risks linked to the need to roll over futures contracts as they expire).
The components of the benchmark index may move in a very different manner from traditional transferable securities markets (equities, bonds, etc.).
In effect, the price of a commodity futures contract is closely linked to the current and future production levels of the underlying product and even to estimated volumes of natural reserves. Climatic and geopolitical factors may also affect supply and demand for the underlying product in question; in other words, such factors may influence the anticipated scarcity of the product on the market. The decorrelation commonly observed between commodity markets and traditional markets is mainly due to these factors, which directly influence commodity prices in particular.

Other potential risks

 

Risk associated with investments on securities issued by emerging countries (“equity” or “bond” funds):  

Equities or bonds of these countries offer more restricted liquidity than large caps of developed countries; consequently, any holding of these securities may increase the portfolio’s level of risk. As market downturns may be more pronounced and faster than in developed countries, the net asset value may decrease more sharply and more quickly.

 

Currency risk

For ETFs where the stocks comprising the benchmark index are denominated in a currency other than that of the ETF or the unit (as applicable).
Such ETFs may carry currency risk linked to the exposure of the benchmark index, resulting from changes in the reference currency/ies of the stocks that make up the index replicated by the ETF. Investors are therefore exposed to fluctuations in the exchange rates of these currencies against the currency of the ETF, or the unit if the ETF offers more than one unit. However, no currency risk exists between the currency of the benchmark index and the currency of the ETF or the unit.
Exchange risk may be as much as 100% of the ETF's net asset value.

 

Liquidity risk

Certain securities in the composition of the benchmark may be difficult to trade or momentarily unable to be traded, particularly because of the absence of trades on the market or regulatory restrictions. These market disruptions may reduce the net asset value of the Fund.