Week after week we analyze, educate and promote the wonderful benefits of ETF's. And, why now? There are so many great uses for ETF's no matter what type of investor you are. There are so many to choose from these days that you can day trade ETF's, bet on individual markets, countries, or even trade corn! With all of the great advantages to the ETF trader, surely there has to be some negative aspects to investing in ETF's?
Truth be told, its not all positive news in the ETF world. There are some disadvantages to investing in ETF's, and some of them are brought on by the very companies that bring ETF's to the market.
There are more ETF's today than there was yesterday, and the day before that. You see, the sheer volume of ETF's available makes it impossible for us to know about all of them. This leads to the majority of ETF's never gaining market share, or better put, they never attract enough traders to make it a viable product. You notice how you never hear of ETF's going out of business? It happens all the time, but never makes the headlines. The point is if no one comes to trade a new ETF then no one else will follow. This can be dangerous for new investors as they may not know the effects of trading low volume products.
Another potential disadvantage to trading ETF's is the volatility. Now, not all ETF's have this issue. There are actually specific ETF's that's sole reason for existence is to reduce volatility in a portfolio. Powershares has a product (NASDAQ: SPLV) that gives the buyer a low volatility approach to investing in the S&P 500. Other than those ETF's that focus specifically on this issue, holding ETF's in a portfolio (if not allocated properly) can create more volatility than an investor is willing to participate in. If you are coming from the mutual fund world then some ETF's may surprise you at how fast they can move.
These issues are not the end of the world, and we could certainly argue that the advantages far outweigh the disadvantages but, as with any investment you should know all aspects of the product before you take the plunge.