ETFs are excellent building blocks for long-term portfolios given the inherent cost-efficiency and transparency benefits associated with this product structure. Nonetheless, like every other financial instrument, ETFs are far from perfect; tracking errors commonly occur, leaving investors wondering why they got one return, when the underlying index had another [Download 101 ETF Lessons Every Financial Advisor Should Learn]. An ETF, according to its prospectus, attempts to replicate an underlying index. How the fund chooses to replicate the index can vary from ETF to ETF, and may include investing in the underlying index, certain stocks, bonds and commodities, or creating a synthetic portfolio. Some ETFs also attempt to replicate the “daily performance” of an index—if the index is up 1 percent then the ETF will also be up very close to 1 percent–and while the fund fulfills this mandate, management fees, trading errors, hedging strategies, cash handling or poor management decisions [...] Click here to read the original article on ETFdb.com. Related Posts: Favorite ETF Positions For 5 Super Investors ETFs Then And Now Checking In On the 10 Largest ETFs Year To Date 10 Surprising ETF Stats From Mid Year ETF Data The Most Successful ETFs Of All-Time