ETFs (Exchange Traded Funds) offer investors an undivided interest in the shape of securities and other assets and are identical in many ways to traditional mutual funds, except that shares in an ETF can be sold or purchased at any point of the entire day similar to stocks on a security exchange via a broker-dealer.
There are some advantages and disadvantages that the ETFs offer the individual investor. These include:
The benefits of ETFs include:
Market Access: ETFs offer investors exceptional exposure to global stock markets, because they span almost all available indexed equity category.
Cost: ETFs are quite inexpensive, great and offer direct access for investors to get exposure to equity markets. ETF investments usually call for minimum transaction costs (without any front-end charges, early squaring penalties or exit charges, and also no high service charges) and are beneficial for tax exemption also.
Flexibility: ETFs offer flexibility for the individual investor. The investor can opt for the choice between direct stock purchasing and diversification via mutual funds. The individual investor can trade in ETFs regularly, and can use ETFs in a variety of different ways.
Tradability/Liquidity: ETFs manifest stock-like features, as they trade all trading day at prices that usually reflect their overall underlying asset value.
While ETFs offer a number of benefits to the investor, but not without any potential disadvantages. These include:
Novelty/Liquidity problems: ETFs are new financial product, particularly for small investors, and has initiated some concerns about their actual liquidity, although some commentators don’t agree with the liquidity concern by pointing to the size of the markets where ETFs are traded. Moreover, there has been some misinformation circulated in the market place concerning ETFs.
The Capability for Tracking Error: It is said that the tracking error with ETFs (the difference of cost between ETF stocks and the virtual cost of the asset/s they manifest) is easy, resulting in possible losses for the individual investor holding ETF shares.
Fund fees: These may be required to pay fund fees which depend on the fund.
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