The hidden perils of ETFs

You can save money and diversify with these cheap index funds, but watch out for the pitfalls.

3 of 5

3. Bid/ask ratio

You can trade an ETF only if there's another investor willing to deal.

Danger: This isn't a problem with big ETFs, but can add hidden costs to small ones, especially if you trade often. These funds may have high "bid/ask" ratios, meaning you pay a few more cents per share to buy and get a few cents less when you sell. Matt Hougan of IndexUniverse says to avoid trading a fund with a ratio above 0.2%.

NEXT: Premium or discount prices

Last updated March 22 2010: 12:03 PM ET

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