In last blog post, we discussed 3 major advantages of ETFs. Now we will discuss some disadvantages of ETFs.
1. Bid-ask Spreads
The demand and supply for ETF do not always match, which means there is a difference between the buy and sell prices - called bid-ask spread. When the bid-ask spread widens, the price you paid for an ETF could be at a premium to its underlying asset value - Net Asset Value.
This is especially a problem for ETFs with small trading volumes.
You can look up an ETF's bid-ask spread, along with the premium or discount to NAV at ETF.com. Just search the ETF, then click the Tradability tab, you will find the ETF's average spread and NAV.
2. Trading Costs
Most of they times, you will have to pay trading commissions when you buy or sell an ETF. Depending on which brokerage firm you use, how frequently you trade, and how much is your investment amount, this cost could add up and become significant.
This is especially a problem for investors using dollar-cost averaging method by investing money regularly to an ETF.
A solution is to find a broker that does not charge commissions for certain ETFs. Most big brokers offer some commission-free ETFs.
1. Bid-ask Spreads
The demand and supply for ETF do not always match, which means there is a difference between the buy and sell prices - called bid-ask spread. When the bid-ask spread widens, the price you paid for an ETF could be at a premium to its underlying asset value - Net Asset Value.
This is especially a problem for ETFs with small trading volumes.
You can look up an ETF's bid-ask spread, along with the premium or discount to NAV at ETF.com. Just search the ETF, then click the Tradability tab, you will find the ETF's average spread and NAV.
2. Trading Costs
Most of they times, you will have to pay trading commissions when you buy or sell an ETF. Depending on which brokerage firm you use, how frequently you trade, and how much is your investment amount, this cost could add up and become significant.
This is especially a problem for investors using dollar-cost averaging method by investing money regularly to an ETF.
A solution is to find a broker that does not charge commissions for certain ETFs. Most big brokers offer some commission-free ETFs.
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