Are ETFs a Safe Investment?

Are ETFs safer than other investments?

ETFs have a reputation for being safer than many individual securities, and for good reason. Offering diversified exposure across many holdings, an ETF effectively cushions the impact when a singular asset in the basket doesn’t perform well.

However, the level of risk you take on will vary depending on the ETF you choose. Some are designed to be conservative, while others are meant for growth and come with higher risks. Let’s take a closer look at how ETFs compare to other common investments.

ETFs vs. stocks

While both stocks and ETFs are subject to market risk, their level of volatility typically differs significantly. Since it can rise or fall sharply based on company news and market conditions, a stock has the potential for higher returns than an ETF but also represents greater risks. On the other hand, ETFs usually hold dozens or even hundreds of stocks, which helps offset ups and downs and reduce risk.

For example, imagine having shares in an individual tech company versus owning an ETF that broadly reflects the performance of the entire tech industry. If that one company struggles, your stock could plummet in value. In contrast, the ETF may dip as well, but its diversification across multiple businesses can help cushion the impact of that single company’s decline.

ETFs vs. mutual funds

Mutual funds and ETFs are similar in that they both pool investor money to buy a diversified mix of securities. Since they usually invest in many different assets, they tend to be less volatile than individual investments, which can help reduce risk.

However, a major difference is how they trade. Like stocks, ETFs are bought and sold on an exchange throughout the day, while mutual funds are priced and traded only once per day after the market closes. ETFs are also often passively managed, while mutual funds are typically actively managed and therefore tend to have higher fees.

As for which vehicle is safer, there’s no definite answer, because the risk level of both is largely dependent on the assets that each fund holds and its investment strategy.

When ETFs are the riskier choice

A large component of an ETF’s risk is its direct relationship to the market it tracks. If the target theme, sector, or index it follows performs poorly, the ETF will usually decline as well. This makes them riskier than products like GICs, high-interest savings accounts, or government bonds, which offer greater principal protection and more predictable returns. However, the trade-off is that ETFs provide more potential for long-term growth.

Are ETFs safe during market downturns?

ETFs are not immune to downturns, as they are designed to track market performance. For instance, if a broad equity market drops by 25%, an ETF tracking that market will likely fall by a similar amount. That said, diversified ETFs can still make downturns easier to weather than holding securities, because the poor performance of a single holding has less impact on a well-spread portfolio.

Some ETFs also focus on “defensive sectors,” which have historically shown stronger resilience during economic recessions. These include health care, utilities, and consumer staples. Other ETFs hold bonds or cash-like investments, which may fluctuate less than stocks during periods of market volatility. Investors can also help smooth out short-term price swings through dollar cost averaging, which involves investing a fixed dollar amount at regular intervals over time.

Ultimately, your level of risk during a downturn depends on the type of ETF you hold, the assets and sectors it tracks, how diversified it is, and your overall investment strategy.

How to invest in ETFs with BMO

If you’re ready to explore ETFs, BMO offers three simple ways to get started:

Direct investing with BMO InvestorLine Self-Directed or adviceDirect (online)

If you’re an experienced investor who feels comfortable making investment decisions on your own, check out BMO InvestorLine Self-Directed. This option gives you full control of the entire ETF investment process, from trading to performance tracking. Plus, you can buy and sell over 100 popular Canadian ETFs with no commission fees.

If you need a bit more support, BMO InvestorLine adviceDirect combines online investing with personalized advice and help. It includes real-time alerts and insights, trading recommendations, and 24/7 portfolio monitoring.

Professionally managed ETF Portfolios with SmartFolio (online)

If you’re looking for a more hands-off way to invest, BMO SmartFolio builds and manages ETF portfolios for you. All you need to do is answer a few questions about your investment objectives and risk tolerance, and you’ll be matched with an ETF portfolio that fits your needs. It works similarly to a robo-advisor, but also involves a team of experts who make the final calls.

Investing in BMO ETF-based mutual funds (in person)

Want the growth potential of ETFs with the structure and convenience of mutual funds? BMO’s ETF-based mutual funds combine end-of-day pricing and automatic investing with broad exposure to various asset classes. They typically have lower fees than traditional mutual funds, while still offering professional portfolio management from BMO experts.

Wrapping up

It makes sense why ETFs are popular with both beginner investors and those who’ve been building their portfolio for years. They’re widely regarded as safe, low-risk investments as most ETFs offer built-in diversification, trading flexibility, and affordable costs.

Of course, like any investment tied to market performance, they can still lose value. However, by understanding what you’re investing and committing to a goal-oriented strategy, you can limit the potential risks and take advantage of the many benefits.