ETFs are illiquid
Its a common fallacy that Exchange Traded Funds ETF's are illiquid, often because investors see a thin market depth. The truth however is that the liquidity of an ETF is only limited to the liquidity of the underlying market. This makes ETFs extremely liquid. Your full service stock broker will contact market makers and negotiate a price for large orders.
ETFs are risky because investors can short sell them
It is true that you can short sell ETFs on the australian and global stock markets, however it is not true that this makes ETF investments risky. Market makers will ensure the price of the Exchange Traded Fund stays around the Net Asset Value - If investors decide to over sell a ETF and push the price away from fair value, the market makers simply arbitrage and make a easy profit, with the ultimate outcome being that the ETF is pushed back closer to the NAV.
ETFs are for short term investors
No, ETFs are better suited to long term investors. Short term traders are likely to prefer to trade the futures market if it is available.
You might as well invest straight into stocks, after all they are the same as an ETF
ETFs are safer than investing into one individual stock due to diversification. Its very easy for one company to go broke, near impossible for the Net Asset Value of a unleveraged ETF fund to hit $0. However with individual stocks you might be able to tailor make a portfolio which suits your strategy better than direct ETFs.
ETFs do not pay dividends
ETF fund managers collect all dividends and pass these onto unit holders (you the investor) when distributions are paid.
Franking credits are not received when investing into ETFs
You receive franking credits on your ETF investment. The ETF fund manager will collect all dividends and franking credits and pass these onto you at the distribution date.
ETFs are riskier than managed funds
Not necessarily, in fact ETF's could be less risky than a managed fund due to superior diversification. A managed fund and an ETF which hold exactly the same assets with exactly the same weighting have exactly the same risk profile.
Stocks and managed funds have superior returns than ETFs
Historical evidence suggests otherwise. Historical studies have shown that around 72% of fund managers do not outperform the S&P 500 Index - ETF's track the index. If you select the right stocks you can significantly outperform an ETF, but this is because you have adopted a different risk profile to the ETF.
ETFs are more expensive than managed funds as you have to pay a brokerage fee
For long term investors, in general this is not likely to be true after holding your investment for 1 year. ETFs are almost certain to be drastically cheaper than a managed fund over the long term.
Market makers can make their own spread
No, the Australian Securities Exchange (ASX) imposes restrictions on how wide market maker spreads can be. Quite often you find Australian ETF's trading with spreads much smaller then the ASX limits due to competition between market makers.
