But of course, no investment is perfect, and ETFs also have their drawbacks, ranging from low dividends to large supply and demand differentials. Identifying the advantages and disadvantages of ETFs can help investors analyze risks and rewards and decide if these securities make sense for their portfolios. These are some of the downsides of investing in ETFs. However, there are downsides to ETFs.
They involve fees, may deviate from the value of your underlying asset and (like any investment) entail risks. That's why it's important for any investor to understand the downsides of ETFs. This problem, together with others, can lead to monitoring errors or make the difference between the profitability of an investment portfolio and the return on a chosen benchmark index. This means that an ETF could end up costing more than the underlying assets and, in fact, an investor could pay a premium when buying that ETF.
Fortunately, this is rare and usually corrects itself over time. Since ETFs tend to be passively managed, their spending ratios are usually much lower than those of more actively managed investments. Mutual funds, on the other hand, require significantly higher fees, since they are very actively managed. ETFs that track an index generally have minimal fees.