Thread by @tradersushma

CRITICAL ASPECTS OF ETF & its DISADVANTAGES

A THREAD 🧵

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#etfseriesbytradersushma
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This is the 3rd post in the series of ETF education. Here I'll explain some negative aspects & disadvantages of ETFs. Much on basics & workings has been covered in previous threads. U may check the same with hashtag
#etfseriesbytradersushma
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Let us start with disadvantages of ETFs.

🛑 FLASH CRASH

A flash crash is rapid fall in prices of stock or any other securities, due to a sudden withdrawal of orders, with quickly recovery, usually within the same trading day.
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High frequency algorithmic trading is mainly responsible for these events. Recently we have seen some of these happening in Options market. The same has happened in past in ETFs market too though quite rarely.
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🛑 BID-ASK SPREAD

It is the gap b/w the bid i.e. level at which the market is willing to buy & ask, the level at which the market is willing to sell. The larger the gap more is the cost to trade the ETFs similarly as in stocks.
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Spread can be small for liquid ETFs but for illiquid funds it can be sufficiently large. So, one has to check the spread before buying ETFs to ensure that the market is trading reasonably & there is no impact cost when one enters or exit the funds.
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🛑 COSTLIER THAN DIRECTLY BUYING STOCKS

ETFS may be cheaper than Mutual Funds but they are costlier as compared to direct purchase of stocks. Unlike stocks with ETFs there are management fees involved in addition to brokerage.
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🛑 DIVIDENDS ARE REINVESTED

Investors who want their dividends on regular basis are not able to do so in case of ETFs as these are reinvested. Though this may be an advantage for some investors, for the dividend reapers it is not a suitable product.
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🛑 DIFFERENCE B/W MARKET PRICE & iNAV

Market price of ETF can sometimes be different from its underlying value represented by iNAV. This can lead to situations in which an investor might actually pay a premium above
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the cost of the underlying stocks/commodities in an ETF. However, this is uncommon and is corrected over time. (NAV to be covered in detail in forthcoming thread)
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CHECKLIST/CAUTION BEFORE BUYING AN ETF UNIT

🔹One should check the iNAV while buying the ETF units. The market price of ETFs should be near around the iNAV.

🔹Always put SL order to purchase/sell ETFs to avoid any kind of Flash Crash.
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🔹Always check the bid-ask spread before doing any trade, to avoid huge impact cost.

🔹Enter only those ETFs which are liquid enough.

🔹Check for each & every cost involved in ETF market.
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🔹Since ETFs has the characteristics of a stock, one should be well aware of the basics of stock market like order types, slippage cost, other costs & brokerages involved, SEBI regulations etc.
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Hence ETFs are suitable only for those investors who are well versed with the nuances of stock market. If you have no knowledge of stock market, do some research before entering this market, instead you may opt for Index Funds offered by Mutual Funds.
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They are also index investing tools but through the route of Mutual Fund with slightly higher cost involved but still lower that other Active funds.

The points of difference b/w Index Funds & ETFs shall be covered in future threads.
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That's all for now, more coming in future posts, stay tuned for complete ETF education.

Retweet for more awareness & wider audience.

Comments/queries welcome in reply section.

Thank u!🙏

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