While ETFs have a lot of benefits they also have some disadvantages. Here are a few downsides:
1. Can be limited to the largest stocks in a market segment
ETFs are very good for diversifying, depending on the sector. However, the ETF might be limited to only the largest stocks within a segment. An index represents usually only the largest stocks in a particular segment and gives access to only a narrow group of equities.
2. Intraday pricing
For long term investors with a time horizon of at least 10-15 years, intraday pricing is irrelevant. Having the freedom to trade more often as opposed to waiting until the day’s end could lead to some emotional trading.
3. Costs can be misleading
ETFs compared to other funds, have typically lower costs, but compared to individual stocks, the costs of ETFs are actually higher. Depending on your broker, you may or may not pay a commission fee, but ETFs require management fees, whereas individual stocks do not.
4. Lower Dividend Yields
ETFs will not pay the same kind of returns as individual high-yielding stock. Since ETFs usually track a broad market, the overall dividend yield will average out to be lower. The benefit though is dividend-paying ETFs are typically less risky.
Sven Franssen