Canadian Securities Course (CSC) Level 2 Practice Exam

The main concern related to concentration risk in ETFs arises from a small number of holdings that may make up a disproportionate amount of the overall fund's value. This means that if a few assets are heavily weighted in the ETF, their performance can significantly impact the overall performance of the fund. In essence, if those concentrated holdings perform poorly, the entire ETF could suffer substantial losses, leading to a higher level of risk for investors.

Concentration risk contrasts with a well-diversified portfolio, where the impact of any single holding is minimized. Therefore, an ETF that has significant weight in just a few securities is considered to carry greater concentration risk, as it may not provide the level of diversification that many investors seek when using ETFs as part of their investment strategy.

Other options, such as low liquidity, high diversification, and low correlation, might highlight different aspects of risk or characteristics of an ETF, but they do not specifically address the primary issue of concentration risk, which is fundamentally about the uneven distribution of value across the ETF's holdings.