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Demand for exchange-traded funds continues to develop as buyers search lower-cost, tax-friendly choices to fulfill their monetary targets. However missteps can occur, specialists say.
ETFs introduced in $540 billion in new cash through the first half of 2025, which exceeded whole inflows for a similar interval in 2024, based on Morningstar. In the meantime, corporations have launched 464 new ETFs by way of June, which might go the 2024 document of greater than 700.
“The rise of ETFs has been nice for buyers, however comfort can even breed complacency,” stated licensed monetary planner Jon Ulin, managing principal of Ulin & Co. Wealth Administration in Boca Raton, Florida.
“The largest errors” aren’t in regards to the merchandise, however how buyers use them, he stated.
Listed here are some pitfalls to know earlier than pouring cash into new ETFs, specialists say.
Buyers ought to ‘look beneath the hood’
Some buyers assume all ETFs are the identical, with out contemplating the underlying belongings, based on Jared Gagne, a CFP with Claro Advisors in Boston.
For instance, some ETFs observe broad indexes, just like the S&P 500, whereas others, equivalent to sector funds, put money into a selected trade or a part of the economic system, he stated. Others might embrace thematic ETFs, specializing in themes or tendencies, or leveraged ETFs, with derivatives that amplify income and losses.
“If you happen to do not look beneath the hood, chances are you’ll assume you are shopping for a diversified fund when in actuality you’ve got purchased one thing extraordinarily slim and dangerous,” Gagne stated.
‘Chasing efficiency’ may be pricey
Like all funding, your ETF picks ought to match your threat tolerance, targets and timeline, specialists say.
However a typical mistake is “chasing efficiency” primarily based on previous returns, which can not proceed, based on CFP Michael Lofley with HBKS Wealth Advisors in Stuart, Florida. He’s additionally a licensed public accountant.
Ulin stated many buyers “rush into buzzworthy ETFs” like bitcoin, hashish or clear power after seeing a rally. However “these funds can fall simply as rapidly as they rose,” he stated.
You’ll be able to ‘erode returns’ with frequent buying and selling
One of many advantages of ETFs is the power to purchase and promote the belongings all through the day, much like a inventory. However some buyers commerce too typically, Gagne stated.
“The great thing about ETFs is low price and tax effectivity, however buyers typically deal with them like buying and selling automobiles as an alternative of long-term constructing blocks,” he stated. “That conduct can quietly erode returns.”
Over the previous 10 years by way of 2024, buyers in U.S. open-end funds and ETFs damage returns by buying and selling, based on a Morningstar report launched in August.
On common, these buyers earned 7%, which was lower than the funds’ 8.2% mixture annual whole return. That 1.2 share level “investor return hole” was attributable to poorly timed shopping for and promoting, the report discovered.
