5 Reasons an ETF May Not Be Right for You

Learn All of the Disadvantages of ETFs

Updated August 19, 2016

While ETFs have many advantages, they may not always be the best fit for your investment portfolio. Before you make any ETF trade, first consider these disadvantages to make sure they are the best fit for your portfolio.

1
International Limitations

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While the U.S. has a plethora of ETF products, some countries only have a few exchange traded funds in which to invest. And those regions that do offer Market ETFs, usually only include large-cap products leaving a lack of mid and small-sized funds.

However, if you do want international exposure in your portfolio, here are some articles that may help you over come the ETF disadvantages when it comes to foreign investing. You can learn more be reading these follow-up articles...

2
Low Trading Volumes

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When ETFs have low trading volumes, the advantage of purchasing and ETF over and index or equity diminishes. The bid ask spread can be too wide to be cost effective. Market Makers tend to be tighter on securities that are more liquid (barring any unforseen news or circumstances)

3
Long Investment Horizon

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The intra-day trading opportunities created by ETFs may not fit into a long-term investor’s strategy. This is more of an advantage for short-term ETF traders, but a disadvantage for long term traders. So, as an investor, it will be important to layout your investing goals before you decide how to include ETFs in your portfolio.

4
Inactivity

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Some ETFs aren’t as actively traded others. It can be a sector-related issue or even a regional issue. When this situation occurs, it may be more effective to invest in managed fund where activity is higher.

While mutual funds have their disadvantages as well, in the case of inactive ETFs, an active mutual fund may be the better fit for your portfolio.

5
Tax Implications

In the case of foreign ETFs, sometimes there may be a tax advantage by opting to invest in an international portfolio. Tax laws vary from country to country, so it may be beneficial for your tax return to find other foreign investments.

There are many benefits to including ETFs in your portfolio, however it is important to understand that they are not the ideal investment for every situation. ETFs should be evaluated on a case-by-case basis for every investing strategy. Understand all the risks involved with ETFs before you get started.

Always Be Aware of Your Risks

As with any investment, a company stock, an ETF, Index or otherwise, please make sure you thoroughly research any exchange traded fund or any financial asset before making any trades (long or short). Conduct your due diligence, watch how an ETF (or ETN) reacts to different market conditions, take a look under the hood and see what is in the fund or note. And if you have any questions or concerns, make sure you consult a broker, a financial advisor, or another financial industry professional. While ETFs have many advantages, they have many disadvantages as well (as does any investment). So it is very important to understand the investment vehicle before you trade it. But once you have a full understanding on the risk, you can consider adding exchange traded products to your portfolio.