The global exchange traded fund industry has hit the $2 trillion mark and analysts agree there are plenty of reasons the industry will continue to grow. The positive points of ETFs will continue to support growth in the business, but there are some risks investors should note.
“The uncertain and challenging market conditions investors have faced during 2012 and over the past few years, combined with the difficulty of finding active managers that consistently deliver alpha, have caused more institutional investors, financial advisors and retail investors to embrace the use of ETFs and ETPs for strategic and tactical asset allocations. ETFs provide greater transparency in relation to costs, portfolio holdings, price, liquidity, product structure, risk and return compared to many other investment products and mutual funds,” according to Deborah Fuhr, Managing Partner at ETFGI. [The ETF Flows Don’t Lie]
The first and some of the most successful ETFs have been simple, broad market index funds that passively track a benchmark. ETFs have been able to trade on exchanges in real time, and allow investors to see what stocks the fund holds at any time of day. The transparency and liquidity present in ETFs give value because investors can trade at an optimal time of day, rather than at the market close, reports Dan Caplinger for The Motley Fool.
With the ease of the trade also comes the chance to rack up extra brokerage costs. Should an investor decide to trade an ETF many times or execute many trades, the brokerage costs can add up. Ultimately, too much trading can backfire. A passive ETF is known for low cost in comparison to a mutual fund, however, the chance to rake up too many transactions can add up quickly and cut into returns. [SPY Marks Two Decades of ETF Growth]