ETFs which are traded similar to stocks on the bourses track an underlying index category and based on it replicate the returns. The ETFs are not traded at the NAV but are traded basis the market determined price which is close to the net asset value for a given fund.
Despite the several upsides associated with this investment class including the lower cost due to low tracking error and low expense ratio of between 0.5%-1%.
Also, on the return aspect, ETFs being passively managed are known to fare better than their actively managed diversified large-cap funds. As an example, SBI ETF Nifty Next 50 has managed to produce a return of 38.7% in the last one year.
The high returns are attributed to long-term commitment to best of index funds in the ETFs unlike the large-cap funds in which the fund managers do the shuffling on an ongoing basis.
The structure of the ETF also approves of the investment, however in recent times, liquidity concerns in the instrument has marred its outlook.
1. Liquidity: At any given point there are not many units of ETFs that could be traded. Also, the price factor at any point can be a deterrent as it could not be in line with the investor's idea.
2. Large scale trading in ETF units results in concurrent Impact cost: With increase in traded units, the price of ETF units also increases which is referred to as the impact cost. So, it determines how much you finally save by investing in ETFs.
3. Difficult to square off investment in ETFs in emergency: For liquidity in ETFs you need to check both the NAV together with the number of units that can be traded on a given day. And so, in case of emergencies, it has been difficult o liquidate investments in ETFs.
4. ETFs not promoted by brokers and agents: As there is no commission for advising and recommending ETFs, agent and brokers do not promote this investment class and hence not much in demand.