ETFs can be attractive, yes, but they're never a sure bet

— -- Q: When I want to bet on a certain investment theme, such as the recovery of the U.S. automakers, I liked to buy an exchange-traded fund to reduce my risk. But sometimes there's not an ETF available. Why not?

A: Exchange-traded funds, or ETFs, can do many great things for your portfolio. But they're not miracle workers.

Like mutual funds, ETFs own baskets of stocks which spreads your risk over many different companies or investments. And ETFs often have very low fees and may be tax efficient.

But, ETFs do have their limitations and aren't the answer to all your investment needs. Not all ETFs necessarily will lower your portfolio's risk and some charge high fees. And if there aren't enough companies to put into an ETF, then the ETF cannot by created due to regulatory requirements.

Don't expect anyone to create a U.S. automaker stock ETF with just GM and Ford, either, as the rules require ETFs to contain more than two stocks. Certainly, you might imagine a U.S. automotive ETF that owned shares of companies in the entire industry, such as suppliers. But again, you really wouldn't be lowering your risk since the suppliers' stocks are highly linked to movements of the automakers' shares.

Your questions brings up a misconception that if you buy an ETF, you're magically taking dramatically less risk. That's not necessarily the case. If an ETF owns stocks that move in tandem, you're only reducing your risk marginally. That's the beauty of ETFs that own the 500 stocks in the Standard & Poor's 500. You're picking up shares of companies in all industry sectors ranging from health care to technology, which cuts your exposure to industry problems. Meanwhile, you're saving on costs since the ETF's expense ratio is likely well below the commission of buying shares in 500 companies.