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Five Reasons an ETF May Not Be Right for You

Learn All of the Disadvantages of ETFs

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While ETFs have many advantages, they may not always be the best fit for your investment portfolio. Before you make any ETF trade, first consider these disadvantages to make sure they are the best fit for your portfolio.

1. International Limitations

While the U.S. has a plethora of ETF products, some countries only have a few exchange traded funds in which to invest. And those regions that do offer Market ETFs, usually only include large-cap products leaving a lack of mid and small-sized funds.

However, if you do want international exposure in your portfolio, here are some articles that may help you over come the ETF disadvantages when it comes to foreign investing.

  • How to Invest in Foreign Markets with ETFs
  • Advantages and Disadvantages of Foreign ETFs
  • 4 Ways to Invest with International Bond ETFs
  • List of International Bond ETFs
  • 2. Low Trading Volumes

    When ETFs have low trading volumes, the advantage of purchasing and ETF over and index or equity diminishes. The bid-ask spread can be too wide to be cost-effective. Market Makers tend to be tigher on securities that are more liquid (barring any unforseen news or circumstances)

    3. Long Investment Horizon

    The intraday trading opportunities created by ETFs may not fit into a long-term investor’s strategy. This is more of an advantage for short-term ETF traders. So, as an investor, it will be important to layout your investing goals before you decide how to include ETFs in your portfolio.

    4. Inactivity

    Some ETFs aren’t as actively traded others. It can be a sector-related issue or even a regional issue. When this situation occurs, it may be more effective to invest in managed fund where activity is higher.

    While mutual funds have their disadvantages as well, in the case of inactive ETFs, an active mutual fund may be the better fit for your portfolio.

    5. Tax Implications

    In the case of foreign ETFs, sometimes there may be a tax advantage by opting to invest in an international portfolio. Tax laws vary from country to country, so it may be beneficial for your tax return to find other foreign investments.

    There are many benefits to including ETFs in your portfolio, however it is important to understand that they are not the ideal investment for every situation. ETFs should be evaluated on a case-by-case basis for every investing strategy. Understand all the risks involved with ETFs before you get started.

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