December 21, 2018

ETF Index Error 7: Index-Funds are safe

ETFs are nowhere near as secure as people like to think and say. For one – we already mentioned this - they don’t represent the actual market, but overweight certain industries. The Swiss index SMI, for instance, contains more banks than the Swiss economy itself. A financial crisis will therefore hit this index even harder.

In addition, many ETFs are overweight in another sense: They contain huge amounts of stocks. If investors sell their ETF, it cannot sell its securities at the same rate and the price drops even faster than the stocks. In extreme cases, this can create an additional loss in value of up to 10%.

Last but not least, many ETF don’t follow the principle of diversification but invest almost all of their capital in just a few securities or sectors. Some hold no shares at all but instead are betting on stock prices with other financial institutions. If this goes wrong, the entire capital is gone.

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