Pros and Cons of Exchange-Traded Funds

Are ETFs right for your investment portfolio?

Digital Content Manager
Feb 9, 2023 at 3:55 PM
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We follow the S&P 500 Index (SPX) closely here at Schaeffer's, which is tracked by the SPDR S&P 500 ETF Trust (SPY). The SPY was among the first exchange-traded funds (ETF), which aren't all that different from mutual funds in the sense they bundle several stocks together. However, ETFs usually track specific indexes, commodities, and sectors, and can be bought or sold just like a stock.

What ETFs Have Going for Them

One of the advantages of owning ETFs is that you will have a bundle of stocks instead of individual shares, leaving you less exposed to the price action of an individual equity. Plus, ETFs are a way to diversify your portfolio and manage risk. Other perks are that they have attractive expense ratios compared to buying stocks individually, and incur fewer broker commission fees.

Disadvantages of ETFs

Something to keep in mind is that if an ETF is not passively tracking an index, such as the SPY, they can incur higher fees as portfolio managers switch up the fund. ETFs that target specific industries or sectors also tend to be less diversified than others, and may increase risk exposure.

 

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