An exchange-traded fund or ETF can be defined as an investment product representing a basket of securities that track an index such as the Standard & Poor’s 500 or Dow Jones. Here are some of the advantages and disadvantages of ETF
Advantages of ETF
1. It is quite easy to invest in ETF as they trade like stocks on an exchange and hence and investor can buy it thought the brokers as they buy the stocks from the brokers.
2. Exchange-traded funds charge lower fees than actively managed mutual funds and hence investor can save money by investing in ETF. Also they provide flexibility in the sense that they can be buy or sold during trading hours which is not the case with the mutual funds which can be bought or sold only at the end of day NAV.
3. It offers investors a wide range of choices in terms of sectors like there are different ETFs for pharmacy or for FMCG or for infrastructure companies, in terms of geographies like emerging markets or developed markets.
Disadvantages of ETF
1. On ETF one has to pay brokerage to the broker for buying and selling ETF and hence it is a costly for those who actively trade in ETF, however those who don’t trade actively ETF, they are better than mutual funds.
2. Since ETF track a particular sector or index, a person who is investing ETF will have to buy also those stocks which he don’t want to buy because ETF has all the stocks of that index or sector and hence can sometimes be a disadvantage while investing in ETF.