But there are also disadvantages to consider before placing an order to buy an ETF. When it comes to diversification and dividends, options may be more limited. Vehicles, such as ETFs, that are guided by an index can also die because of an index without an agile manager to protect performance from a downward movement. However, ETFs have drawbacks.
They involve fees, may deviate from the value of your underlying asset and (like any investment) entail risks. That's why it's important for any investor to understand the downsides of ETFs. This problem, together with others, can lead to monitoring errors or the difference between the profitability of an investment portfolio and the return on a chosen benchmark index. That means that an ETF could end up costing more than the underlying assets and, in fact, an investor could pay a premium when buying that ETF.
Fortunately, this is rare and usually corrects itself over time. An investor can research an ETF in advance to understand any disadvantages and see if it fits their needs. Before making a trade, investors should understand the disadvantages of ETFs and consider whether the disadvantages outweigh the advantages.