Exchange-traded funds (ETFs), put simply, are a grab bag of assets within a particular sector. Rather than having to parse through the different possibilities in the market, investors can opt to entrust their money to a fund manager who assembles a "basket" of stocks or securities. There are many different kinds of ETFs – for example, an entrepreneur could invest in one that features stocks from medical technology businesses or sovereign bond certificates.
However, there are dangers inherent in this system that investors should be aware of. They may not know it, but the supposed stability promised by ETF firms is not as rock-solid as they claim.
First and foremost, ETFs have become more intertwined with high-frequency trading (HFT) operations, meaning that those who invest in these markets could be vulnerable to sudden drops in value. This is especially true for fund managers looking for yields in riskier assets that are susceptible to global economic shifts, potentially leading to default and a loss of investor wealth. While circuit breakers to stop large value drops have been put in place since the May 6, 2010 "flash crash," the underlying dangers certainly remain.
Another risk associated with ETFs relates to varying pay structures that different management teams request. The problem is that you could pay a 1 percent expense ratio – the cost of running the fund – on an investment that is no more beneficial and costs a fraction of that. Capably evaluating a particular organization's strengths or weakness is tough in this case, especially considering the sheer volume of firms that all promise years of substantial returns.
Instead of putting your hard-earned money on the line without any clear line of profit, you might want to consider cash flow real estate as an alternative form of wealth preservation.
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