Money & Investing - Banks.com

One of the types of investment gaining in popularity is the exchange traded fund (ETF). ETFs are funds that are very similar to mutual funds, in that they are composed of more than one company’s stock, or more than one currency, etc. However, they trade like stocks on the market, so that in some ways they are easier to deal with. And they are becoming popular because some of them offer good returns. Investopedia warns of five things to watch out for when investing in exchange traded funds:

1. Fees. Since ETFs are traded like stocks on the market, they incur commissions and fees like stocks on the market. So watch out for disappearing returns — especially if you are inclined to make frequent trades.
2. Volatility. Like mutual funds, there is a certain amount of volatility that is taken out by the diversity that some funds come with. However, it is important to note that some funds are not that diverse. Solar ETFs are seeing some volatility right now, and currency ETFs that follow FX trading can fluctuate rather dramatically.
3. Liquidity. One of the things you want to be sure of is your ability to sell. You want exchange traded funds that are liquid. A thinly traded ETF can cause problems for you down the road.
4. Capital gains. Watch out for exchange traded funds that distribute capital gains. This can mean capital gains taxes. Additionally, if you re-invest your distribution, you will end up paying the fees — just as you would for a stock investment.
5. Lump sum. For those who like dollar cost averaging, ETFs are not the best choice. They are more conducive to lump sum investing. Plus, with the dollar cost averaging, you have commissions to worry about.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.