| This article considers what advantages and | | | | ETF shares. |
| disadvantages ETFs offer the individual investor, | | | | Fund fees: |
| and what other factors the individual investor | | | | These may be substantial (depending on the fund). |
| should consider prior to making an ETF | | | | Tips for ETF investors |
| investment. | | | | Any individual thinking of investing in an ETF and in |
| Advantages of exchange traded funds | | | | ETF trading should ensure that they understand |
| ETFs offer the private investor a number of | | | | the following: |
| advantages. These include: | | | | Market fundamentals and investment goals |
| Market access: | | | | As with other types of investment, individuals |
| As above, ETFs give investors unprecedented | | | | thinking of investing in ETFs should ensure that |
| exposure to international stock markets, as they | | | | they understand the fundamentals of the market, |
| span nearly every available indexed equity class. | | | | and that they have articulated their own |
| Cost: | | | | investment goals and concerns. They should |
| ETFs are a cheap, efficient and direct means for | | | | understand what risks attach to investing in ETFs |
| investors to get exposure to equity markets. An | | | | (e.g. potential counterparty risks), as no |
| ETF investment typically has low transaction costs | | | | investment is risk free. They should also get to |
| (avoiding front-end charges, early redemption | | | | grips with understanding what the underlying |
| penalties or exit charges, and high service | | | | assets are that the ETF is seeking to "mirror". |
| charges) and can be tax efficient. | | | | The different types of ETF |
| Flexibility: | | | | Investors should understand that there are now a |
| ETFs offer great flexibility for the individual | | | | variety of ETFs on the market, and should |
| investor, who is now no longer faced simply with | | | | consider which one/s suit their needs best. |
| the binary choice between direct stock ownership | | | | Beginners in the market may be best opting for |
| and diversification via mutual funds. The individual | | | | ETFs that mirror commonly understood stock |
| investor can trade in ETFs regularly, and can use | | | | indices. |
| ETFs in a variety of different ways. | | | | The need for risk management |
| Tradability/Liquidity: | | | | - Investors should seek to manage their risks by |
| As above, ETFs have stock-like features, as they | | | | ensuring that they are happy with each ETF's |
| trade throughout the trading day at prices that | | | | counterparty/ies. |
| generally reflect their net underlying asset value | | | | - As with other forms of investment, investors |
| (provided that there is minimal tracking error). | | | | should try to ensure that their ETF portfolios |
| Disadvantages of ETFs | | | | contain the right assets and that they are |
| While ETFs offer a number of advantages to the | | | | sufficiently diversified. |
| individual investor, it is important to also note their | | | | - Novice investors may wish to avoid "leveraged |
| potential disadvantages. These include: | | | | ETFs", given their potential for generating losses. |
| Novelty/Liquidity problems: | | | | The need to avoid over-complexity |
| As noted above, ETFs are a relatively new | | | | Novice investors especially would be well advised |
| financial product, especially for small investors, and | | | | to keep their ETF investments simple, especially in |
| this has raised some concerns about their true | | | | light of the increasing complexity of ETFs in the |
| liquidity (although some commentators have | | | | market place. |
| dismissed the liquidity concern by pointing to the | | | | The need for cost minimization |
| size of the markets in which ETFs are traded.) | | | | - ETF costs can be minimised by using an online |
| Furthermore, there appears to have been some | | | | broker (which should keep commissions to a |
| misinformation circulated in the market place | | | | minimum). |
| concerning ETFs. | | | | - Investors should also ensure that their ETF |
| The potential for tracking error: | | | | portfolios are low fee and tax-efficient. |
| Some experts have claimed that the tracking | | | | The need for advice |
| error with ETFs (i.e. the difference between the | | | | As always, should they have any doubts, |
| price of ETF stocks and the true price of the | | | | investors should consult a market professional |
| asset/s they represent) can be substantial, leading | | | | who is experienced in dealing with ETF |
| to possible losses for the individual investor holding | | | | investments. |