V2 14/10/2024

Risk disclosure statement

This risk disclosure statement describes certain risks identified by InvestEngine (UK) Limited (‘InvestEngine’) in relation to investments generally and in relation to the services provided by InvestEngine.

These Disclosures are made available on our website. InvestEngine may amend this statement from time to time by updating this page. You should check this page from time to time to ensure that you are happy with any changes.

Investments carry different kinds and degrees of risk. InvestEngine wants to help you understand the complex subject of investment risk so that you can make the most informed decisions possible with respect to your InvestEngine Investments.

The text below describes certain key risks associated (to differing extent in different circumstances and with varying predictability) with the investments (exchange traded funds) used by InvestEngine in providing our services. The risks set out here are not exhaustive and other risks may be relevant or arise in the future.

If you are in any doubt about the risks involved in investing or the services that InvestEngine provides, please ask us or seek independent financial advice.

The value of your investments and income can go down as well as up

When investing, there is always the risk that your investments and the income generated from them could fall in value as well as rise. You may get back less than the amount you originally invested or even lose the full amount. Any income generated from ETFs can vary depending on such events as changes to interest rates and the dividends the underlying securities pay. Information on past performance, and forecasts where given, are not a reliable indicator of future results or performance.

Leaving your savings with a bank or other deposit taking institution as cash may seem a relatively ‘safe’ option, there is the risk that the real value of your savings is reduced by the effects of inflation. The interest rate you earn on your savings account must at least equal the prevailing rate of inflation, or you will lose money in real terms.

Investing in things that are not cash increases risk and there is not always guarantee of returns. Share prices fall as well as rise. Companies can run into financial difficulty. Even governments sometimes struggle to repay their debts. Property prices can fall. Everyone looking to make an investment does so for the opportunity to make positive returns but in doing so, they must also accept the possibility that they may end up with less money than they originally put in.

The potential returns from an investment are, to some degree, linked to the risk an individual investor is willing to accept. In general, the higher the risk, the higher the potential return an investor could potentially receive — though this isn’t always the case in practice.

Government policy, political events, social issues and public sentiments may have wide reaching consequences for the value of investments.

Exchange rate and interest rate fluctuations may have an adverse effect on the value of investments. If the underlying holdings of your InvestEngine investments are in a currency which is different to the denominated currency of your InvestEngine account, you will face currency risk.

Liquidity risk arises when the value of an investment cannot be realised quickly because there are insufficient buyers in the market. For instance, in a falling market an investor may be unable to sell quickly without accepting a much reduced price — or at all. Liquidity risk is limited for InvestEngine products, as our ETF universe is made up of highly liquid ETFs.

Risks such as Liquidity and Settlement risk (below) may result in transactions taking longer than expected. It is not recommended that customers invest funds that they need to maintain their lifestyle, pay bills or meet other obligations as funds may not be available to meet these obligations.

Unfortunately, taking on more risk in the hope of achieving a greater return also increases, the chance of losing money. None of the investments provided by InvestEngine are risk free, and you may therefore get back less than you initially invest. While our objective is to select investments with the potential to achieve the optimal level of return for your accepted level of risk, there can be no guarantees that the investment strategy will succeed.

Uninvested cash

Any uninvested cash you hold with InvestEngine won’t earn you anything. You could be at risk of having the real value of your cash being eroded by inflation. You could minimise this risk by choosing to deposit the cash in an interest paying account or you could turn on AutoInvest to avoid it remaining uninvested.

Keeping £1,000 in a savings account paying 4.5% interest would earn you £3.75 per month (or £45 per year). On the other hand, investing that same £1,000 in a balanced portfolio for 10 years (like one holding 60% global stocks and 40% global bonds), meant it could have been worth over £2,000 by 31/12/2023.

Exchange traded fund (ETF)

With InvestEngine, you can only invest in exchange traded funds (‘ETFs’) — and exchange-traded commodities (ETCs) for assets like gold and other precious metals. ETFs are investment funds, traded like shares, which hold investment assets such as shares and bonds. ETFs normally closely track the performance of a financial index, and as such their value and income can go down as well as up (and you may get back less than you invested). Some ETFs rely on complex investment techniques, or hold riskier underlying assets to achieve their objectives.

Index risk

Most ETFs are designed to match the performance of a financial index and are therefore described as ‘passive’ investments. Such ETFs aren’t actively managed, for example they won’t sell a company’s shares if the company is in financial trouble — unless the share is removed from the index. This means that the ETF will move up and down with the index and the ETF manager will not take defensive positions, or sell losing positions, in a market downturn. This also means that the manager won’t increase exposure to positions that it anticipates increasing in value. This lack of active management means that investors’ fortunes are primarily related to the performance of the index. The best way for an investor to deal with index risk is to understand what is in the index and the rules governing what goes into, or out of the index, as covered in the ETF’s documentation which is available on our platform.

Tracking error

In addition to their investment being exposed to the movements of the index, investors are also at risk from the ETF not matching the performance of the index, known as tracking error.

Tracking error is the difference between the performance, or return, of the ETF’s portfolio and the underlying index. One key reason for tracking error is that An ETF has a management fee and other expenses that an index doesn’t have. The frequency of these transactions, such as how often an ETF rebalances its portfolio, can increase the costs that increase tracking error and diminish an ETF’s performance.

Certain ETFs may exhibit tracking error because the weights of securities in their portfolios get out of line with those in the index because of lags in updating index weights. When the weights are based on market capitalisation, this will not be much of a problem, because the weights are tied to the capitalisation of the stocks, and if a stock moves up in price in the index, that will be captured in the ETF. The difficulty arises when an ETF assigns weights by another means, such as equal weighting or some arbitrary method of weighting. In these cases, changes in the values of the securities in the index may not show up in the ETF until it is rebalanced, where the ETF’s securities are adjusted to match those in the index. This lag can induce tracking error.

Another source of tracking error comes from the fact that many ETFs do not hold all the securities that make up the index. There are two ways for an ETF to track an index. The first is replication, where the ETF holds all the securities in an index in the same proportions as in the index. The second is by representative sampling, where the ETF uses a sampling methodology to select securities that it believes will provide the same performance as the entire portfolio. This methodology usually produces larger tracking errors than if the ETF buys the whole index.

Settlement Risk

Once execution has taken place, the trade must then settle. Settlement is the process which finalises the trade, by completing delivery of cash to buy a security, or delivery of the security in return for cash in a sell transaction.

We will seek to carry out settlement on a T+2 basis. This means that we aim to settle trades within 2 business days of execution. Whilst trades are in the settlement process, you will be unable to create any other order, transaction or withdrawal regarding the assets or funds relating to the trade.

Whilst the risk of settlement failure is very low, there is a moderate risk that settlement of transactions are delayed as a result of external factors, such as market liquidity, RSP bandwidth or other unforeseen operational issues. We will seek where possible to settle T+2, but this may not always be possible, and settlement may take longer.

InvestEngine minimises settlement risk by building robust back-office processes and selecting reliable counterparties to ensure settlement. Late settlement can occur with any trade and is likely to be outside of InvestEngine’s control.

Counterparty risk

Counterparty risk is also known as default risk. Default risk is the chance that companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. Counterparty risk is a risk that both parties should consider when evaluating a contract.

Concentration risk

When a portfolio is concentrated in a limited number of investments, it becomes more vulnerable to adverse developments that affect those investments.

Spread

The bid-offer spread is the difference between the price an asset is bought for (buy price) and the price it is sold for (offer or ask price). 

Fractional Investments

With InvestEngine you are able to invest in fractions of a share or security (Fractional Investments). This allows you to invest in smaller amounts than you otherwise would, as the price of a share in some of the investments available on our Platform would otherwise far exceed the minimum investment size.

Fractional investments do however carry some additional risks to whole-share investments. Due to the nature of a fractional, you will be allotted the proportionate value of a share you have invested in, rather than the whole of the share itself. This means that your fraction only exists within the InvestEngine Platform and you will be unable to transfer out any fractional investment. Depending on market factors and liquidity, the purchase or sale of a fraction may take longer than a full share, and prices may have moved more than anticipated when creating an order.

Tax

The tax treatment of an ETF is subject to change, which could affect your investment in the future. In some cases, the returns from trading ETFs may potentially be subject to income tax rather than capital gains tax. The ongoing tax liabilities are determined by both your individual circumstances and the continued status of the ETF If you are unsure of your tax position you should consult a qualified tax adviser.

The buying and selling of ETFs for rebalancing purposes or investment decisions, will create profit and losses within your portfolio. These transactions may therefore have an impact on your Capital Gains Tax Annual (CGT) Allowance if they are held outside an ISA. You may need to declare these profits or losses as part of your overall CGT calculation within your tax self assessment.

Other risks

Other risks include, but are not limited to:

• Investors may not benefit from the same entitlements as if they held the shares directly (e.g. voting rights).
• Investors cannot control the investments that are made by an ETF. This discretion is held by the investment manager appointed by the ETF provider.
• Although an ETF may be denominated in a particular currency, underlying investments may be held in other currencies and thus the ETF may be subject to changes in the value of currencies.
• ETFs may be suspended from trading due to the closure of the underlying market or due to the winding down of the fund.
• Client Money may be held in fixed term deposit accounts, which means the money cannot be withdrawn until the expiry of the fixed term. Although this will not affect the protections of your money, in the event that InvestEngine were to fail it may take longer for funds to be returned to you than intended.

 

InvestEngine (UK) Limited is Authorised and Regulated by the Financial Conduct Authority. The Firm Reference Number is 801128. InvestEngine (UK) Limited is incorporated in the UK with company number 10438231 and has its registered office at Lawford House, Albert Place, London, United Kingdom.