Canadian Securities Course (CSC) Level 2 Practice Exam

What are the categories of risks related to investing in ETFs?

1. ETF specific risk and liquidity risk

2. General investing risk and market risk

3. Market risk and ETF derivative specific risk

4. ETF specific risk and ETF derivative specific risk

The correct answer is: ETF specific risk and ETF derivative specific risk

The correct answer highlights two significant types of risks associated with investing in exchange-traded funds (ETFs). ETF specific risk refers to factors that can affect an individual ETF, such as the performance of the underlying assets, the fund's management, and the specific sector or market in which the ETF operates. This type of risk is unique to each ETF, meaning that while one ETF may perform well, another may not due to its specific holdings or strategy. The second part, ETF derivative specific risk, pertains to risks associated with the use of derivatives within certain ETFs. Some ETFs may use options or futures to enhance returns or to hedge risks; however, these instruments can introduce additional complexity and risks, such as leverage risk and the potential for significant losses if the derivatives do not perform as expected. This combination of ETF specific risks and derivative risks provides a comprehensive view of the unique challenges that investors face when dealing with ETFs. Understanding these risks is crucial for making informed investment decisions.