Likewise for all investments, there are unique pros and cons for each type of investment. For the investor, investing in ETFs provide a lower costs to own a basket of stocks as compared to purchasing the stocks individually. For an example, an investor could be exposed to 20 individuals stocks concurrently from a single ETF transaction. However, for the investor to replicate a similar portfolio, it would require the investor to perform 20 individual transactions involving 20 brokerage transaction fees. This would involve a higher fees.
Furthermore, it is often hard for retail investors to replicate the percentage of ETF portfolio exactly as the prices of stocks are varied and would require to purchase specific units. Hence, in most cases it requires a higher amount of investments that hinders most investors.
Pros
- Single transaction to access to a basket of stocks or industries
- Lower brokerage fees as compared to purchase individual stocks
- Allows diversification of risks
- Decrease value of a specific stock is averaged out onto the portfolio
Cons
- Gains on specific stock is averaged out onto the portfolio
- Actively-managed ETFs have higher management fees than a single stock
- In some smaller ETFs, lack of liquidity may limit amount of buy-sell transactions
ETFs are great for investors who want to invest in a variety of different assets with just one trade. In addition, ETFs are also popular with investors who want to invest in commodities like gold and silver. ETFs come with a number of other benefits, which we will break down for you in another blog post.
