Set out the risks ETFs carry

ETF investors face risks beyond the market risk of the holdings. Counterparty risk arises where a fund relies on swaps or lends securities, and above all in exchange-traded notes, which are unsecured debt of the issuing bank. Fund closure risk arises when a small fund is shut or a regulatory or index change forces liquidation, crystallising gains or losses at an unwelcome time. Expectation-related risk arises when investors misunderstand how a product works: a leveraged or inverse fund resets its exposure daily, so over longer periods its return drifts away from the stated multiple of the index return, most of all in volatile markets. The trap is treating an ETN as carrying the same risks as an ETF.