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Exchange traded funds, or ETF’s, are portfolios of stocks, bonds and other forms of securities or assets singularly traded at the stock market similar to individual stocks. Investing in ETF’s, much like any other type of investments has its own pros and cons. Here are some of them.

Exchange Traded Fund Pros

One of the pros of investing in exchange traded funds is that they offer some level of flexibility for the investor. Comparisons for ETF’s are usually made against traditional mutual funds.

Since they are traded much like individual stocks, investors may buy or sell them at any time during the trading day at whatever price they may be trading at that point. Mutual funds, on the other hand, are priced and traded only once, which occurs at the end of each trading day.

Another big advantage ETF’s offer investors is that they may cost lower to operate and maintain compared to mutual funds. Another advantage is their tax efficiency. Since they generate relatively low capital gains, they are usually taxed lower than other investment products. This tax efficiency is further enhanced since investing in them doesn’t mean selling securities in order to meet investor redemptions.

Exchange Traded Fund Cons

Along with the advantages of investing in ETF’s, there are also certain disadvantages to consider. First off, ETF’s are usually bought through a broker, who may charge brokerage commissions that may eat up on the relative low expenses enjoyed by such investments. The steep brokerage commissions may likely be noticed by those who invest only small sums in ETF’s. Brokers usually forego commissions for large ETF investments.

Another possible disadvantage of investing in ETF’s depends on trading activity. Quite a number of such funds are not as actively traded depending on certain sectors or regions where they are being bought and sold. This may affect their ability to earn for some investors. ETF dividends are being paid out to investors at the end of each quarter, which cannot be reinvested. This can limit investing performance to a certain degree for those who wish to reinvest dividends.