ETF Drawbacks - Fidelity (2024)

Be sure to look at both the advantages and disadvantages of ETFs.

WILEY GLOBAL FINANCE

While ETFs offer a number of benefits, the low-cost and myriad investment options available through ETFs can lead investors to make unwise decisions. In addition, not all ETFs are alike. Execution prices and tracking discrepancies can cause unpleasant surprises for investors.

Buying high and selling low

ETFs have two prices, a bid and an ask. Investors should be aware of the spread between the price they will pay for shares (ask) and the price a share could be sold for (bid). In addition, it helps to know the intraday value of the fund when you are ready to execute a trade.

At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF’s current intraday value is as well as the market price of the shares before you buy.

ETF Drawbacks - Fidelity (1)

Sign up for Fidelity Viewpoints weekly email for our latest insights.


Subscribe now

Tracking error

ETF managers are supposed to keep their funds’ investment performance in line with the indexes they track. That mission is not as easy as it sounds. There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors.

Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees. In addition, the timing of dividends is difficult because stocks go ex-dividend one day and pay the dividend on some other day while the indexes’ providers assume the dividend is reinvested on the same day the company went ex-dividend. This is a special problem for ETFs that are organized as unit investment trusts (UITs), which, by law, cannot reinvest dividends in more securities and must hold the cash until a dividend is paid to UIT shareholders. ETFs that are organized as investment companies under the Investment Company Act of 1940 may deviate from the holdings of the index at the discretion of the fund manager. Some indexes hold illiquid securities that the fund manager cannot buy. In that case the fund manager will modify a portfolio by sampling liquid securities from an index that can be purchased. The idea is to create a portfolio that has the look and feel of the index and, it is hoped, perform like the index. Nonetheless, ETF managers who deviate from the securities in an index often see the performance of the fund deviate as well.

Several indexes hold one or two dominant positions that the ETF manager cannot replicate because of SEC restrictions on non-diversified funds. In an effort to create a more diversified sector ETF and avoid the problem of concentrated securities, some companies have targeted indexes that use an equal weighting methodology. Equal weighting solves the problem of concentrated positions, but it creates other problems, including higher portfolio turnover and increased costs.

ETF Drawbacks - Fidelity (2024)

FAQs

ETF Drawbacks - Fidelity? ›

Market risk

What is the downside to an ETF? ›

At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business. Make sure you know what an ETF's current intraday value is as well as the market price of the shares before you buy.

Are Fidelity ETFs worth it? ›

ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.

Why I don't invest in ETFs? ›

Low Liquidity

If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.

Does Fidelity charge fees for ETFs? ›

$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs) and options (+ $ 0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

Can you go wrong with ETFs? ›

ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.

What happens if ETF goes bust? ›

Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.

What is Fidelity's best performing ETF? ›

Fidelity Blue Chip Growth Fund (FBGRX)

One of Fidelity's top-performing funds, FBGRX is also one of its oldest. Dating back to 1987, FBGRX has managed to outperform the Russell 1000 Growth Index since inception, returning an annualized 12.9% versus 11.5%.

Is Vanguard or Fidelity better for ETFs? ›

Both Fidelity and Vanguard have a wide variety of low-cost mutual funds and ETFs. If you're simply looking at the options offered by each firm, Fidelity has more options available.

Should I just put my money in ETF? ›

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

Has an ETF ever failed? ›

Like any business, even low-cost ETFs need to generate revenue to cover their costs. Plenty of ETFs fail to garner the assets necessary to cover these costs and, consequently, ETF closures happen regularly.

Has an ETF ever gone to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

Why are ETFs doing poorly? ›

There are a few reasons why ETFs generally die. Low assets under management, high fees, poor performance, and short track records are closely associated with the probability of closure. In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.

How does Fidelity make money on ETFs? ›

For iShares® ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive long-term marketing program that includes promotion of iShares® ETFs and inclusion of iShares® funds in certain FBS platforms and investment programs.

Is Fidelity financially stable? ›

Fidelity was voted the most trusted wealth management company for 2023 by the readers of Investor's Business Daily,9 earning top rankings for "financial soundness, quality of products and services, protecting privacy and security, and sensitivity to customer needs."

Which ETFs are free on Fidelity? ›

Commission-Free ETFs on Fidelity
Symbol SymbolETF Name ETF NameAsset Class Asset Class
IVViShares Core S&P 500 ETFEquity
IEFAiShares Core MSCI EAFE ETFEquity
AGGiShares Core U.S. Aggregate Bond ETFBond
IJHiShares Core S&P Mid-Cap ETFEquity
5 more rows

Can you lose money investing in ETFs? ›

ETFs are stocks which derive their values from the underlying stocks of net assets of an investment. These investments are not guaranteed and as such could ALL go to $0 in which your NAV would be $0. You could sell or not sell and it wouldn't make any difference as there would be no value to the investment.

What happens to my ETF if Vanguard fails? ›

In theory, if Vanguard went bankrupt, your assets within the ETF should be safe, as they're technically yours held in trust by Vanguard. So if Vanguard collapsed, then what would likely happen would be that another manager would take over the ETF, or the assets would be sold off and you'd be paid out.

Can you lose more than you invest in ETFs? ›

A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. Certain double or triple-leveraged ETFs can lose more than double or triple the value change of the tracked index. Therefore, these types of speculative investments need to be carefully evaluated.

Are ETFs riskier than funds? ›

One isn't safer than the other. It all depends on what the fund owns. For example, an ETF invested in emerging markets would normally be considered riskier than one investing in developed markets, like the US. Or an index fund holding stocks might be considered riskier than one holding bonds.

Top Articles
Latest Posts
Article information

Author: Msgr. Benton Quitzon

Last Updated:

Views: 5685

Rating: 4.2 / 5 (63 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Msgr. Benton Quitzon

Birthday: 2001-08-13

Address: 96487 Kris Cliff, Teresiafurt, WI 95201

Phone: +9418513585781

Job: Senior Designer

Hobby: Calligraphy, Rowing, Vacation, Geocaching, Web surfing, Electronics, Electronics

Introduction: My name is Msgr. Benton Quitzon, I am a comfortable, charming, thankful, happy, adventurous, handsome, precious person who loves writing and wants to share my knowledge and understanding with you.