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What are the advantages and disadvantages of investing through ETFs?

Last Updated: Apr 10, 2015 03:27PM EDT

Advantages:
  • ETFs generally have lower operating costs than most diversified investment products, such as mutual funds, because ETFs typically are not actively managed. 
  • DriveWealth offers ETFs and individual equities starting at $2.99 per trade. DriveWealth does not offer mutual funds.
  • ETFs are highly liquid and offer transparent pricing - meaning typically smaller bid/ask spreads and frequent price updates during a trading day.
  • ETFs offer built-in diversification in a single security -allowing you to spread your investments across different asset classes; segments within an asset class; and sectors within an asset class
  • ETFs are tax-efficient since capital gains taxes are only realized when the position is sold, whereas mutual funds incur taxes every time assets in the fund are sold.

Disadvantages:
  • ETFs may be limited to larger companies. In some countries, investors might be limited to large-cap stocks due to a narrow group of stocks in the market index.
  • ETFs 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 doesn't mean that it cannot be affected by volatility.
  • If an ETF is thinly traded, there can be difficulties getting out of the investment, depending on the size of your position in relation to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and ask. With so many new ETFs coming to the market, you need to make sure that the ETF is liquid.
  • ETF costs, due to potential management fees, may be higher than the cost to invest in individual stocks.
  • ETFs track a broader market and generally pay a lower dividend than high-yielding individual stocks or groups of stocks.

Learn more about the ETFs offered by DriveWealth.


All investing carries risk. Past performance is not indicative of future returns, which may vary.  Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal.  Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading.

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support@drivewealth.com
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