Today’s infographic from StocksToTrade.com highlights the basics around ETFs, including how they work, what type of assets they can track, and the pros and cons associated with investing in them.
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Despite a wide range of benefits, ETFs do have some detractors, however. Critics would be quick to point out that:
- some ETFs are very thinly traded, providing wide bid/ask spreads and lower liquidity,
- there can also be instances where technical issues can cause a performance gap between the ETF and the index it tracks, known as tracking error and as a final point, it’s worth mentioning that
- there is some counterparty risk with ETFs – for example, even if you “own” physically-backed gold through the SPDR Gold Trust (GLD), there is a chance that in extreme situations that you may not actually get to see the benefit of that gold. The counterparty risk stems from the possibility of a party failing to deliver on their promises, and is actually quite common to see with other types of assets, as well.
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