Advantages and disadvantages of the ETF

Exchange traded funds (ETFs) have become immensely popular with investors these days. These are similar to index funds with the only difference that they are generally traded like stocks on the stock exchange.

Here we list some advantages and disadvantages of investing in ETFs:

Advantage

1. Low fees: ETFs have lower fees than index funds. For example, handling fees can be around 1% for S&P 500 trackers like SPY and IVV. However, for some exotic ETFs like Vanguard Emerging Markets ETF and Russell 2000 Index ETF.

2. Fiscally efficient. There is no capital gain / loss when you buy the ETF. You should sell when it makes sense to you.

3. Convenience: It is very easy to invest in ETFs in the same way as in stocks. You have to buy them in the same way that you would buy stocks.

Disadvantages

1. Disadvantages of index funds. As you get the advantages of the index fund (low fees), you also get many of its disadvantages. Since the ETF blindly tracks the index, it means that you have stocks of stocks that you might not like being in that index.

2. Market spread. If you buy any rare ETFs, the bid / ask margin would be somewhat prominent. It can be easily avoided as long as you invest in some prominent ETFs.

3. Comfort. The ease with which you can sell or buy the ETF can sometimes force you to think that you sold an ETF too early and that you would have earned more if you had held it for much longer.