ETF Investing: ETF Investments Risks & Precautions

The latest article which I had published recently was for ETF Investing: ETF Investments, Investments in Exchange Traded Funds. However, dont assume that all the ETF investments are safe and you can blindly go and buy the ETF units and remain assured that your ETF investment is safe and you can have a nice and peaceful sleep. As a reader of the site, most of the regular readers may have observed that we favour a lot of ETF Investments, ETF Investing or Exchange Traded Funds Investing. In this article, we will look at the ETF investing with a different perspective - the side of Risks in ETF Investments.
Let us understand it very clearly that there is no investment which can be considered as risk free investment. If you think bonds are safe compared to stocks, then read the Collapse of Lehman Brothers Bonds. So keep in mind that whether it is ETF or any other investment, nothing is 100% safe. The government backed securities are also safe, but to the extent of the government stability and control.
I've always talked about the huge size of market and market participants. The same is true for ETF as well. So there will be hundreds of ETF's available, but you should take care to select which one is correct investment for you.

Here are a few points to keep in mind while investing in ETF or exchange traded funds:

Look at the size of the ETF: The bigger the ETF, the more market efficient it will be and the more volume it will be traded into.

Understand the Liquidity of ETF: Before investing, You must know how your ETF investment is going to be traded. If the liquidity is low, that will mean that many investors are not interested in that ETF and hence you may find it difficult to buy or sell the units freely. So keep an eye on ETF liquidity and daily volume.

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Dont bank on Leverage for trading in ETF: If you are a trader, please note that there are better options to trade on leverage or margin. Go for futures or options if you love leverage or trading on margin money. As a personal recommendation, I always look at ETF's as long term investment tool, so I will recommend the same.

Dont forget the Tax on ETF: You may get into the fancies of manking good income from ETF investments or ETF trading. However, dont forget the tax implications of your income from ETF business. Different countries have different tax definition for securities, stocks, etc. The meaning of ETF may fall into stocks for one country, but may be taxed as a mutual fund in another country and may be taken as business income in some other country. So make your calculations before booking your profits