Exchange-traded funds (ETFs) have become a sought-after alternative to mutual funds. The lower risks and costs associated with it certainly contributed to this increase.
While they offer investors a host of benefits, they are not the holy grail of investment as touted by many financial experts.
According to AFL enthusiast and longtime Australian investor, Darren Herft, Exchange-traded funds (ETFs) have their own unique drawbacks.
“In some cases, especially with regard to foreign stocks, ETFs can limit investors to large caps because of fewer stock groups in the market index,” says Darren Herft.
He goes on to say that the lack of access to medium and small businesses keeps highly lucrative growth opportunities out of reach for Exchange-traded fund (ETF) investors.
“Long-term players have time horizons that range from 15-20 years, and they may not account for the intraday price swings associated with Exchange-traded funds (ETFs),” says Darren Herft.
He argues that fluctuations in hourly prices can cause investors to trade more than they normally would and distract them from their investment goals.
While many people believe that Exchange-traded funds (ETFs) guarantee lower fees, this is not necessarily the case.
“Exchange-traded funds (ETFs) are usually compared to investing in other funds, but their costs are higher when compared to specific stocks,” says Darren Herft.
He goes on to say that brokerage commissions remain the same, that stocks incur zero management fees to investors.
“Greater Exchange-traded funds (ETFs) are likely to track low-volume indices and may lead to higher bids/asks. It may be appropriate for many investors to find options in specific stocks,” he adds.
While there are some dividends that Exchange-traded funds (ETFs) pay, their returns may not give investors the same returns as stocks. This is because investors can choose high-dividend-yielding stocks, while Exchange-traded funds (ETFs) track a wider range of securities.
“The risks may be lower, but Exchange-traded funds (ETFs) may not be the best investment option for those who are more risk-tolerant,” says Darren Herft.
Herft cautions investors against speculation and believes that leveraged Exchange-traded funds (ETFs) that use financial derivatives to boost the returns of an underlying index should be carefully examined.
“If it’s held for longer terms, the losses can add up quickly,” he says.
He believes that double-leveraged exchange-traded funds (ETFs) don’t always translate into double returns.
“Investors should do their own research and develop an understanding of the investment vehicles they choose,” Herft says.
The Australian entrepreneur believes that while Exchange-traded funds (ETFs) can be an excellent addition to any investment portfolio, investors should not be blinded by their allure.
“Exchange-traded funds (ETFs) have many advantages over other managed funds, such as mutual funds, but one has to know the risks.”
He thinks Exchange-traded funds (ETFs) need highly competent managers to be successful in the market.
“Investment vehicles that live off an index can also die from it, without proper guidance a downward movement is guaranteed,” he adds.
