What Are The Pros and Cons of ETFs?

The main advantages associated with ETFs are diversification, liquidity, lower fees compared to mutual funds, lower capital gains tax, minimal discounts or premiums in the pricing.

The common disadvantages associated with ETFs include the lack of diversification in some ETFs, higher costs compared to stocks, higher risk in leveraged ETFs, lower dividend yields than stocks.

Most investors love ETFs because of the diversification offer, given that they usually track a basket of stocks. For example, an ETF that tracks the S&P 500 gives the investor exposure to all the stocks contained in the index.

ETFs are also very liquid because their prices are updated throughout the day compared to mutual funds, whose prices are adjusted at the end of the day based on their net asset value.

Some passive ETFs have lower expenses versus mutual funds, which are typically actively managed. Passively managed ETFs also tend to attract lower capital gains tax than mutual funds that distribute capital gains tax to the holders once shares are sold for a profit.

The main disadvantages associated with ETFs are: sector and country-specific ETFs are not very diversified, the intraday prices can be distracting for long-term investors, ETF costs may be higher than holding individual stocks. Lastly, leveraged ETFs could compound your losses.