Influence of the growing ETF industry on active investor relations work 33Fundamentals of passive investments and ETFs resulting from the fact that ETFs compared to close ended mutual funds are open ended and intraday trading is possible Stevenson and Tuck well 2019 p 20 Balchunas 2016 p 6 In addition ETFs generally have a higher risk diver sification than individual shares or actively man aged funds Furthermore a high level of investor protection is guaranteed Eibl 2008 p 17 In con trast to fund managers who specialize in a few dif ferent shares or titles ETFs are broadly diversified and contain up to 1 700 shares Deutsche Börse 2018 p 9 Even with a diversification of 50 differ ent securities the influence on the overall perfor mance is significantly reduced and the investment risk is considerably lowered by such a sensibly structured investment portfolio Eibl 2008 p 24 Since ETFs are part of the issuer s special assets which is held in custody by an independent custo dian bank an issuer risk does not apply In case of an insolvency of the issuer of the ETF the assets of an ETF remain unaffected Eibl 2008 pp 26 Moreover a reinvestment risk does not exist as there is no maturity date and ETFs are running indefinitely Deutsche Börse 2018 p 10 Irrespective of whether the ETF is a performance or price index investors benefit from profit dis tribution Either in form of a reinvestment in the fund in case of an accumulating fund or in form of dividend payments in case of a distributing fund Deutsche Börse 2018 p 10 General sta ble returns are expected especially regarding the major indices which have generated continuous returns over the last twenty years Heinrich Jän ner 2018 p 388 Points of criticism In general ETFs are a relatively low risk invest ment option Heinrich Jänner 2018 p 392 Never theless as with most other investment strategies prices can develop differently than expected and there is a general market risk However the losses triggered by this risk are relatively low due to the usually high diversification of ETFs Deutsche Börse 2018 p 54 Exchange rate risk is present in ETFs whose components are listed in another currency Currency risk is a fluctuation risk and fluctuations in value can generally lead to losses Heinrich Jänner 2018 p 394 Nevertheless investors can hedge to avoid this risk which comes with higher costs or invest directly in hedged ETFs where the costs for the currency hedge are already included in the management fees Stevenson and Tuckwell 2019 p 7 Deutsche Börse 2018 p 54 Deviation risk can arise due to tracking errors In the case of swap based ETFs the swap partner usually a bank may default resulting in counterparty risk Drobetz 2020 5 36 Anyhow the risk is limited in Europe due to EU regulations These stipulate that the value of derivative transactions may not exceed 10 of the NAV of an investment fund per counterparty Some ETF providers require further hedging mechanisms vis à vis their counterpar ties e g the deposit of securities Physical repli cating ETFs are also subject to counterparty risk if the management lends securities to institutional investors which can then be used for short sell ing Deutsche Börse 2018 pp 55 Howbeit this default risk due to securities lending is very low as only investors with high collateral are selected by the management Due to the existing liquidity risk liquidation in times of falling prices can lead to losses when selling the units therefore ETFs should generally be invested for the long term Heinrich Jänner 2018 p 394 Another risk albeit very small is the possible closure of an ETF Another criticism of ETFs is that they undermine the market s quality selection process by buying shares of all the companies in an index This has the consequence that companies are also sup ported with capital that for various reasons should rather not receive any

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