The actual commission paid to the broker may be the same, but there is no management fee for a stock. Generally, investors will want to reinvest those capital gains distributions; to do so, they will have to return to their brokers to buy more shares, leading to new fees. Since different ETFs deal with the distribution of capital gains in different ways, it can be difficult for investors to stay informed of the funds in which they participate. It is also crucial for the investor to learn how an ETF deals with capital gain distributions before investing in that fund.
Leveraged ETFs are a good example. These ETFs tend to experience a drop in value as time goes by and due to daily restarts. This can happen even when an underlying index is thriving. Many analysts warn investors not to buy leveraged ETFs at all.
Investors who take this approach should carefully monitor their investments and consider risks. Liquidity is an important consideration when investing in exchange-traded funds (ETFs). ETFs have different liquidity profiles for several reasons. Investing in an ETF with relatively low liquidity can cost you in terms of a wider supply and demand spread, a reduction in opportunities to trade profitably and, in extreme cases, the inability to withdraw funds in certain situations, such as a major market crash.
Invested and leveraged ETFs often use derivative contracts, such as options and short-term forward contracts, to achieve their established objectives. These types of instruments have an inherent temporary decline and, as a result, tend to lose value over time, regardless of what happens in the index or benchmark index followed by the ETF. Therefore, these products are only intended for day traders or others with very short retention periods. The pros and cons of averaging the cost in dollars.
These are some of the downsides of investing in ETFs.