ETFs offer diversification benefit at a low cost. In spite of these benefits, one should make note of the risks that are involved with such investments. Firstly, there are many kinds of ETFs available in the market including international and exotic ones. Hence selecting the right ETF to meet your need is the key to avoiding additional risks like political risk and liquidity risk that may be associated with these ETFs. ETFs can also be exposed to counterparty risk and currency risk depending on their underlying holdings.
ETFs can have different structures depending on what they invest in and how they distribute the capital gains from the portfolio. This can affect the tax liability for the investor. For instance, ETFs using in-kind exchanges do not distribute capital gains to end investors while ETFs involving derivatives
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