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Advantages and Disadvantages of ETFs


Since their introduction in 1993, exchange-traded funds (ETFs) have exploded in popularity with investors looking for alternatives to mutual funds. Both institutions and individuals could see the benefit of these instruments – a basket of assets designed to track an index – that offered low management fees and higher intraday price visibility. But of course, no investment is perfect, and ETFs have their downsides (low dividends, large bid-ask spreads) too. Identifying the advantages and disadvantages of ETFs can help investors navigate the risks and rewards, and decide whether these securities, now a quarter-century old, make sense for their portfolios.


Advantages of ETFs

Diversification

Trades Like a Stock

Lower Fees

Immediately Reinvested Dividends

Limited Capital Gains Tax

Lower Discount or Premium in Price


Disadvantages of ETFs

Less Diversification

Intraday Pricing Might Be Overkill

Costs Could Actually Be Higher

Lower Dividend Yields

Leveraged ETF Returns Skewed




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