Exchange-traded funds are a great way to get diversification at a low cost, and have been a great way to hold dividend stocks. But there are no free lunches, and the same holds true for ETFs.
The issues we’ll be focusing on here are the pricing issues that could arise in many ETFs during periods of market crisis. To understand what those potential problems could be, let’s look briefly at the internal plumbing of exchange-traded funds and why they were created.
What Are ETFs?
ETFs were created as a way for institutional investors to own a broad swath of the stock market in a structure that was more efficient than the mutual fund format or buying shares directly. An ETF is technically a unit investment trust, which contains a fixed portfolio of securities and which is put together by a sponsoring firm and listed on an exchange.