One of the potential downsides of an ETF is that, because it does not always hold every asset in the index it is trying to replicate, there will be a slight difference between its performance and that of the index. Although this “tracking difference” can work in an investor’s favour, it can also work against them.Although the majority of the ETFs we choose are traded in British pounds, those traded in a different currency can expose you to foreign exchange risk. The exchange rate fluctuations may affect the capital performance and income generated from these ETFs when converted to sterling.All investments carry risks, and this is no different for ETFs. And while they may not be protected under the Financial Services Compensation Scheme, in the very unlikely event that the ETF provider goes bust, you would still have access to the ETF assets, which are ring-fenced and held by a separate custodian.