"Any time you're investing in an ETF, whatever happens inside that ETF's sector will expose you to risk," said Pete Lang, president of Lang Capital. "They [generally] are not actively managed.
"No one is steering that ship," he added. "You're investing in an index, and that's a higher-risk proposition due to potential volatility."
Once considered a niche product, ETFs have emerged as a dark horse in the race for investor money. With an increased investor focus on costs, coupled with a long-running bull market contributing to gains in many index-based investment options, ETFs are pulling in more assets than traditional mutual funds.
In 2016 investors poured $287 billion into ETFs while they pulled nearly $349 billion out of traditional actively managed mutual funds, according to research firm Morningstar. Index funds fared better, grabbing almost $221 billion in new investor money last year.
But with more than 1,900 ETFs available and new ones hitting the market continually, the question for some investors is how to choose which ones to include on the shortlist.
The first thing to do is make sure you don't put all your eggs in one basket.
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"Make sure you're adequately diversified globally and among asset classes," said certified financial planner George Gagliardi, a financial advisor with Coromandel Wealth Management. "You don't want everything in your portfolio to move in lockstep together."
For instance, if you choose only an ETF that tracks the Standard & Poor's 500 Index and then U.S. stocks hit the skids, so will your entire portfolio.
And at that point, if you have neglected to properly vet yourself for your risk tolerance (your ability to stomach market turbulence) and risk horizon (the length of time until you need the money), you run the risk of selling at a loss if you can't sit still and wait to see if it's a quick dip or a long-lasting bear market.
"There have been periods where the market has been down two years in a row and it can take five or more years to get back to where you were before," Gagliardi said. "You want to have upside gains, but be careful that you don't get overconfident in a rising market."