Every type of investment has their advantages and disadvantages. Researching the different ways to invest, along with the pros and cons will help people decide which type of investment will suit their needs, as well as help them have a better understanding of the investment world as a whole. While looking at the different ways to invest, people will most likely come across the option of an exchange traded fund, or an ETF. This type of investment has become more and more popular over the years, and there are thousands of ETFs to choose from. Before going ahead and jumping on the bandwagon of ETFs, it is important to learn why they are becoming so popular, along with the reasons why they may not be the right investment for you.
One of the pros that comes along with an ETF is their low cost. This is one of the reasons that they have become increasingly popular. ETFs are passively managed. This means that they track a stock or bond index, which means that there is low maintenance to manage one of these accounts. Indexes are a pool of different stocks or bonds, which means that the manager of the account will not have to be constantly looking for different ones to invest in because they are all in one place. Compared to an actively managed account, the cost to run an ETF is much lower, which means that people will not have to pay a large amount to their manager, and they will be able to keep their money in their pocket.
Another advantage that comes with having an ETF is the liquidity. This means that the ETF is very easy buy and sell on the market. This is because an ETF is like a stock being bought and sold on the stock market. Unlike other mutual funds, you can buy and sell an ETF in the matter of a day, and have cash in your pocket quickly. For people who want to have their money quickly from an investment, and ETF is the way to go.
One of the cons of an ETF can also be a pro, and that is the liquidity of the ETF. When a person has the ability to buy and sell their ETFs easily, people may over-trade and chase ETFs that seem like they are doing very well. You can lose money from over-trading and chasing the hot fund because there should be a plan when trading ETFs, instead of trading on whim. When there is not a plan, and it is easy to trade ETFs, a person could make one wrong decision, and lose a lot of money.
There is another disadvantage that can happen with an ETF. This is performance. Although ETFs function like an index fund, it does not always replicate the performance of the portfolio. There can be issues with management fees, tracking errors, and the way that the ETF is traded. These factors could result in the ETF having a much different performance that the index itself.
Every investment decision that you make will have its pros and cons. Researching the different investment opportunities that are available to you, while looking at what advantages they offer, along with what disadvantages may come along with them will help you make the decision on where you want to invest your money.