7 Disadvantages of ETF Investing


Investment decisions require that all facts relating to a specific investment vehicle are known, and ETFs do not differ. Knowing the disadvantages helps to prevent possible falls and to make smart profits if everything goes well. Here are 7 ETF flaws you should know.

1. Lack of Liquidity

Liquidity is the biggest factor in a publicly-traded ETF, stock, or anything else. Liquidity means that you are able to get away from it relatively quickly, without changing the price, when you buy anything. Depending on the size of your position in relation to the average trade volume, there may be problems if an ETF is thinly traded. The biggest sign of an illiquid investment is large spreads between the bid and ask.

You need to make sure an ETF is liquid before buying it, and the best way to do this is to study the spreads and the market movements over a week or month. The rule here is to make sure that the ETF you are interested in does not have large spreads between the bid and ask prices.