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What are the potential risks/disadvantages of an Exchange-Traded Fund?

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As with any investment that involves a stock index, exchange-traded funds may suffer from the volatility of the market, so the value of an exchange-traded fund may drop after it is purchased. Furthermore, the past performance of particular of a particular exchange-traded fund is, of course, no guarantee of future success. Despite many advantages, exchange-traded funds also possess some unique risks and disadvantages:

Brokerage Commission Fees: As noted above, the fact that exchange-traded funds are traded on the stock market offers investors added flexibility, but it also means that investors generally pay a commission for each of their transactions. In certain situations the purchase of a number of shares may thus result in brokerage fees that mitigate the advantage of the lower expense ratios.
Inflexibility: Retail investors within an exchange-traded fund have more options than they would in a mutual fund, but in another way their flexibility is far more limited. Whereas mutual fund shareholders may redeem their shares, retail investors who hold exchange-traded fund share must sell their shares on the stock market if they wish to dispose of those shares. If the market begins to rapidly decline, retail investors may experience difficulty unloading their shares.
Dividend Reinvestment: Mutual funds often reinvest dividends on a daily basis, but some exchange-traded funds reinvest only monthly, or even quarterly. Though it�s not a certainty, slower dividend reinvestment may lead to lower returns for exchange-traded funds.
Settlement Period: Redemptions of mutual funds and index funds generally occur within one day. In contrast, sales of exchange-traded funds require a settlement period of three days.

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