An exchanged-traded fund has greater daily liquidity and lower rates unlike other investments, making it a great tool for diversification. But it has disadvantages as well.

First off, higher portfolio risk. Numerous perils such as political risks, business risk, and market risks can impact a portfolio in one way or another. Whilst these securities are known for countering such dangers, the wide array of specialty ETFs can actually raise the portfolio’s overall risk. Purchasing a leveraged ETF can actually beef up the risk rate of your trade, for instance. We tend to forget gliding through these funds can raise the riskiness of a portfolio. It is advised to not invest too much on ETFs or we might lose some or all our capital in the end.

Now we also have trading risk. Sure we can buy ETFs like stocks. However, it can affect your investment return and make you an active trader. Once it happens, you begin timing the market or choose the next booming sector on a regular basis. That mindset and methodology can increase the fees you pay and the risk, too. Not to mention it is much harder to trail the fast-paced market. For the record, no one has managed to become successful in timing the market.

Ascribing to excessive trading negatives can lead to higher liquidity risks. Remember not all funds have high trading volume and huge asset base. Pricing ineffectivity, if not acted upon in a timely way, could make you lose more money (or pay higher fees) and result in hefty losses.

Tax efficacy is one the advantages of this security. Holders use in-kind exchanged with authorized participants, in which that exchange is optimized in return for actual stocks. APs pay for the capital gains on these stocks. Therefore, holders won’t be able to receive capital gains disbursements at as the year ends. But then not all ETFs hold good tax efficiency. Failure to grasp the benefits and repercussions of tax in these funds may end up increasing your tax bill in the long stretch.