5 ETFs Flaws You Shouldnt Overlook
Exchange-traded funds (ETFs) can be a great investment vehicle for small and large investors alike. These popular funds, which are similar to mutual funds but trade like stocks, have become a popular choice. However, there are some disadvantages that investors need to be aware of before jumping into the world of ETFs. In this article, we will look at some of the disadvantages of ETFs. Good information is an investors most important tool. Read on to find out what you need to know to make an informed decision.
One of the biggest advantages to ETFs is that they trade like stocks. As a result, investors can buy and sell during market hours as well as put advanced orders on the purchase such as limits and stops. Conversely, a typical mutual fund purchase is made after the market closes, once thenet asset value of the fund is calculated. (To read more about ETFs, see Introduction To Exchange-Traded Funds.)
Every time you buy or sell a stock you pay a commission; this is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investments performance. No-load mutual funds, on the other hand, are sold without a commission or sales charge, which makes them advantageous, in this regard, compared to ETFs. It is important to be aware of trading fees when comparing an investment in ETFs to a similar investment in a mutual fund. (For more about how commissions can affect your portfolio, read Dont Let Brokerage Fees Undermine Your Returns.)
If you are deciding between similar ETFs and mutual funds, be aware of the different fee structures of each, including the trading fees. And remember, actively trading ETFs like stocks can severely reduce your investment performance as commissions can quickly pile up.
ETFs, like mutual funds, are often lauded for the diversification that they offer to investors. However, it is important to note that just because an ETF contains more than one underlying position doesnt mean that it cant be affected by volatility.
The potential for large swings will mainly depend on the scope of the fund. An ETF that tracks a broad market index such as the S