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. But of course, no investment is perfect, and ETFs also have their drawbacks, ranging from low dividends to large supply and demand differentials.

Identifying the advantages and disadvantages of ETFs can help investors deal with risks and rewards and decide if these securities make sense for their portfolios. Since ETFs come as a package of diversified equity rather than a single stock, there is less volatility on a daily basis. Depending on your goals, that may or may not help your strategic perspective. Low volatility means that your stocks won't rise 20% on any given day, but they won't fall 20% either.

You may have heard that ETF costs are an advantage, not a disadvantage. That's true in some contexts, such as when compared to mutual funds. In fact, ETFs tend to have lower fees and costs, but as standalone products, ETFs aren't free. Since they are not purely passive products, you'll have to pay a fund manager (or many) to manage the shares.

Expert traders can skip the fees involved in an ETF by managing stocks on their own. While ETFs offer tax advantages and other benefits, it's important to remember that, like any investment, they also have disadvantages. Despite the drawbacks of ETFs described above, we would say that ETFs are valuable to large groups of investors if used correctly.