Counterparty Risk Definition

Learn the definition of counterparty risk and other ETF terminology from the etf.com glossary.

ETF
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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Learn more about Counterparty Risk

Counterparty risk in ETFs refers to the potential for loss if the entity on the other side of a financial transaction, such as a derivatives contract or a securities lending agreement, fails to meet its obligations. In ETFs, this risk arises when the fund engages in activities like trading futures or participating in swap agreements. If the counterparty defaults or faces financial distress, the ETF may incur losses. To mitigate this risk, investors assess the creditworthiness of counterparties and monitor the ETF's risk management practices. Counterparty risk underscores the importance of due diligence in evaluating an ETF's overall risk profile.

Related Terms

Futures, Derivatives-Based ETF, Credit Quality

ETF Glossary is etf.com’s collection of key terms and definitions related to exchange-traded funds. ETFs are investment funds that are traded on stock exchanges, and they can encompass a wide range of asset classes, including stocks, bonds, commodities and more. Given the diverse range of ETFs and the complexity of financial markets, having a clear understanding of ETF-related terminology is instrumental for investors looking to make informed decisions, manage risks effectively and navigate the evolving landscape of ETF investments.