The hidden perils of ETFs

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

4 of 5

4. Premium or discount prices

A "market maker" works to ensure that the supply of ETF shares equals demand, so that the price always closely matches the value of the underlying securities.

Danger: This doesn't work smoothly for some funds, if they own assets that don't trade often and are thinly traded themselves. Claymore U.S. Capital Markets Bond recently had an average discount of 4.3%.

NEXT: When ETFs die

Last updated March 22 2010: 12:03 PM ET

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