Tuesday , 5 March 2024

ETFs: How They Work & the Pros and Cons Associated With Investing In Them

Today’s infographic from StocksToTrade.com highlights the basics around ETFs, including how they work, what type of assets they can track, and the pros and cons associated with investing in them.

The original article/infographic has been edited for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read. For all the latest – and best – financial articles sign up (in the top right corner) for your free bi-weekly Market Intelligence Report newsletter (see sample here) or visit our Facebook page.
There are many views out there on ETFs, but it is generally accepted that they provide an inexpensive, transparent, and convenient way to get access to many different asset classes. This makes it easy to diversify a portfolio, and it also makes ETFs simple to buy and sell…

Despite a wide range of benefits, ETFs do have some detractors, however. Critics would be quick to point out that:

  • some ETFs are very thinly traded, providing wide bid/ask spreads and lower liquidity,
  • there can also be instances where technical issues can cause a performance gap between the ETF and the index it tracks, known as tracking error and as a final point, it’s worth mentioning that
  • there is some counterparty risk with ETFs – for example, even if you “own” physically-backed gold through the SPDR Gold Trust (GLD), there is a chance that in extreme situations that you may not actually get to see the benefit of that gold. The counterparty risk stems from the possibility of a party failing to deliver on their promises, and is actually quite common to see with other types of assets, as well.

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