Why Exchange-Traded Funds May Not Be Right for You

While the U.S. boasts many ETF offerings, other countries have very few. Furthermore, most foreign ETFs are strictly large-cap products. So if you wish to diversify into small- and mid-cap products, you may be out of luck, outside the U.S.

The advantage of purchasing an ETF over an index or equity diminishes when ETFs demonstrate low trading volumes, because the bid-ask spread can be too wide to be cost-effective. Barring any unforeseen news or circumstances, market makers tend to be tighter on securities that are more liquid.

While intra-day trading opportunities created by ETFs might benefit short-term ETF traders, they night not serve a long-term investor’s strategic outlook.

Some ETFs aren’t as actively traded as others. This might occur  because of sector or regional issues. Consequently, it may be prudent for some investors to consider managed funds, where trading activity levels are typically higher.

While some U.S. ETFs carry negative tax implications, certain foreign ETFs can offer tax advantages to an international portfolio, because tax laws vary from country to country. Therefore it might be beneficial to your tax situation, to contemplate foreign investments.