However, ETFs have drawbacks. They involve fees, may deviate from the value of your underlying asset and (like any investment) entail risks. That's why it's important for any investor to understand the downsides of ETFs. But of course, no investment is perfect, and ETFs also have their drawbacks, ranging from low dividends to large supply and demand differentials.
Identifying the advantages and disadvantages of ETFs can help investors deal with risks and rewards and decide if these securities make sense for their portfolios. There are also some drawbacks. As with any investment, ETFs offer certain benefits and drawbacks that you should consider. Most ETFs don't rebalance their portfolios.
Remember that, in general, an ETF is programmed to track an index. In an index, as winners increase in price, they take up a larger percentage of an index. At the same time, some stocks fall in price and become a smaller percentage of an index. By owning the index, or the ETF that tracks the index, you may own more expensive and overvalued stocks and fewer valuable or undervalued stocks.
This is called index investing and allows you to expose yourself to the entire S%26P 500 index by purchasing a single ETF. Make sure you know what the current intraday value of an ETF is, as well as the market price of the shares, before buying. It may be more advantageous to buy a limited number of the best companies instead of owning the entire index. You may also have to pay similar fees when you buy or sell ETFs, depending on the ETF you invest in and the brokerage firm you use.
The remaining money would have to be set aside for your next paycheck, when you would have to calculate how many shares you could buy at the price of the next paycheck. If you want to buy a particular rare collectible car or piece of art, an ETF won't be able to make it happen. When you buy shares in an ETF, you buy part of that entity and, in turn, the investments it holds. Instead, they only buy and sell what is needed for the ETF to continue to track the intended investment mix.