Like all investments, EFTs come with their own pros and cons.
Some of the pros include:
Diversification: ETFs let you purchase a variety of stocks or other assets in a single transaction. This can aid in increasing the diversity of an asset class. ETFs also provide you with the option to invest in markets or assets that may be hard to access or costly. Additionally, you can diversify among ETFs to reduce your risk of loss in the event that an ETF provider fails.
Transparency: ETFs make their net asset value available.
Low cost: ETFs generally have lower expense ratios than actively managed funds, making them a cost-effective option for investors.
Ease of trading: ETFs are highly liquid and can be bought and sold on the stock exchange throughout the trading day, allowing for greater flexibility and ease of trading.
The cons are:
Currency risk: If the ETF invests in foreign assets, you run the risk of your results being impacted by currency fluctuations.
Risk of liquidity: Some ETFs invest in less liquid assets, such as loans from emerging markets. The ETF provider may occasionally find it challenging to issue or redeem securities as a result.
Tracking errors: Tracking mistakes occur when an ETF’s price deviates from the index or asset it is intended to follow. This may be caused by the underlying assets’ illiquidity, fees, taxes and other elements.
Investment risk: The investment risk related to using the asset class or strategy that the ETF gives access to is where most of the risks of investing in ETFs arise. For instance, if you invest in an ETF that offers exposure to the whole Australian share market, movements up or down in the share market will logically have an impact on the success of your investment.
Shutdown risk: As with the share market, with EFTs, there are popular and unpopular options for investors to put their money toward. Each year, roughly 100 ETFs get shut down or cease operations. However, the shutdown of an ETF does not automatically result in the loss of all your investment. In this situation, the fund is liquidated and the shareholders are paid the dividends in cash. Quite often, the ETF will realise capital gains during the liquidation process; this could result in an unwanted tax burden on both the company and its shareholders.