The exchange traded funds (ETFs) have become immensely popular amongst the investors these days. These are just similar to the index funds with a sole difference being that they are usually traded as the stocks in the stock exchange.
Here we are listing few advantages and disadvantages of making the investment in the ETFs:
1. Low fees: The ETFs have lower fees as with the index funds. Like, the management fees can be about.1% for the S&P 500 trackers like SPY and IVV. However, for some exotic ETFs like Vanguard Emerging Markets ETF and Russell 2000 Index ETF.
2. Tax efficient. There is no capital gain/ loss when you buy the ETF. You must sell when it makes sense to you.
3. Convenience: It is very easy to make investments in the ETFs just the same way as in stocks. You have to buy them in a same way as you would buy stocks.
1. Index fund disadvantages. As you get the advantages of the index fund (low fees), you also get many of its disadvantages too! As ETF blindly follows the index, it means it holds shares of stocks you might not like that happen to be in that index.
2. Market spread. If you purchase some rare ETF, the ask/ buy spread would be somewhat prominent. It can easily be avoided provided you make investments in some prominent ETFs.
3. Convenience. The ease with which you can sell or buy the ETF can sometimes compel you to think that you sold an ETF too early and would have gained more if you would have kept it much longer.