Are there any disadvantages of ETFs compared to mutual funds?
Costs Could Be Higher. Most people compare trading ETFs with trading other funds. Yet, if you compare ETFs to investing in a specific stock, then the ETF costs are higher. The actual commission paid to the broker might be the same, but there is no management fee for a stock.
ETFs are generally lower than those that are charged by actively managed mutual funds because their managers are merely mimicking the contents of an index rather than making regular buy and sell decisions, For some investors, the design of a passive ETF is a negative.
ETF trading risk
Spreads can vary over time as well, being small one day and wide the next. What's worse, an ETF's liquidity can be superficial: The ETF may trade one penny wide for the first 100 shares, but to sell 10,000 shares quickly, you might have to pay a quarter spread.
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.
While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.
In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends. Still, unique risks can arise from holding ETFs as well as tax considerations, depending on the type of ETF.
Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
The disadvantage is that ETFs must be purchased from brokers for a fee. Moreover, investors may incur a bid-ask spread when purchasing an ETF.
ETFs that focus on income, such as dividend or bond ETFs, can be sensitive to changes in interest rates. Rising interest rates can lead to lower bond prices, affecting the value of bond ETFs. Keep in mind that the ETF may hold bonds with different lengths, each experiencing different rate risk.
For disadvantages, international wire transfers (a form of EFT) can be expensive to send and receive, with fees from the originating and receiving banks, possibly intermediary bank fees, and miscellaneous fees like investigation fees if the wire transfer is lost.
Why is ETF not a good investment?
Buying high and selling low
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business.
The single biggest risk in ETFs is market risk.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often.
ETFs typically have lower expense ratios than mutual funds because more of them are passively managed. In recent years, though, mutual funds fees have dropped their fees, which are now closer to ETF fees.
For the most part, ETFs are less costly than mutual funds. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds. However—all else being equal—the structural differences between the 2 products do give ETFs a cost advantage over mutual funds.
| Exchange-Traded Funds | Mutual Funds |
|---|---|
| Some ETFs can be purchased commission-free and are cheaper than mutual funds because they do not charge marketing fees. | Some mutual funds do not charge load fees, but most are more expensive than ETFs because they charge administrative and marketing fees. |
Greater flexibility: Because ETFs are traded like stocks, you can do things with them you can't do with mutual funds, including writing options against them, shorting them, and buying them on margin.
The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.
However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.
Why don't people invest in mutual funds?
They're prone to market risk
Some of the examples of market risk that mutual funds suffer from are as follows - economic developments, geopolitical scenarios, government policies and legal framework, investor sentiment, interest-rate movements, and unexpected large-scale events.
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.
If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.
"Some ETFs are much more susceptible to closure than others," says Emily Doak, CFA, director of ETF and index fund research at the Schwab Center for Financial Research, "so it's important to be aware of certain characteristics when researching funds for your portfolio."
A leveraged ETF's price can theoretically go negative, but it's extremely rare and usually only happens in extreme market conditions. Leveraged ETFs use financial leverage to amplify the returns of an underlying asset, such as the S&P 500 Index.
