Exchange-traded funds and exchange-traded note risks include risks due to their underlying securities (e.g., stocks, bonds, derivatives, etc.), and can be affected by risks such as market, currency, credit, political, interest rate, etc., that are described in other glossary entry.
The liquidity of the underlying stocks in the index can affect their liquidity. Liquidity risk can result from an insufficient number of “active participants” performing their duties as intermediaries and liquidity providers in the market. “Spread risk” may also occur, which is the difference between the bid and the ask price of a security. Since ETF/ETN transactions are priced throughout the day and are traded on the exchanges like stocks, widening spreads may occur and have an impact on certain portfolios or transactions.
As with any security, if the ETF/ETN “fails,” the investor may lose their gains and invested principal. ETFs and ETNs can carry additional expenses based on their share of operating expenses and certain brokerage fees. Some ETFs and ETNs have the potential to be affected by “active risk;” a deviation from its stated index.