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Demand for exchange-traded funds continues to grow as buyers search lower-cost, tax-friendly options to satisfy their monetary targets. However missteps can occur, consultants say.
ETFs brought 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 means of June, which may move the 2024 document of greater than 700.
“The rise of ETFs has been nice for buyers, however comfort may breed complacency,” mentioned licensed monetary planner Jon Ulin, managing principal of Ulin & Co. Wealth Administration in Boca Raton, Florida.
“The most important errors” aren’t in regards to the merchandise, however how buyers use them, he mentioned.
Listed here are some pitfalls to know earlier than pouring cash into new ETFs, consultants say.
Buyers ought to ‘look underneath the hood’
Some buyers assume all ETFs are the identical, with out contemplating the underlying property, 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, such as sector funds, put money into a selected business or a part of the financial system, he mentioned. Others may embrace thematic ETFs, specializing in themes or developments, or leveraged ETFs, with derivatives that amplify income and losses.
“If you happen to do not look underneath the hood, it’s possible you’ll suppose you are shopping for a diversified fund when in actuality you’ve got purchased one thing extraordinarily slender and dangerous,” Gagne mentioned.
‘Chasing efficiency’ may be expensive
Like all funding, your ETF picks ought to match your danger tolerance, targets and timeline, consultants 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 mentioned many buyers “rush into buzzworthy ETFs” like bitcoin, hashish or clear power after seeing a rally. However “these funds can fall simply as shortly as they rose,” he mentioned.
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 property all through the day, much like a inventory. However some buyers commerce too typically, Gagne mentioned.
“The fantastic thing about ETFs is low value and tax effectivity, however buyers typically deal with them like buying and selling autos as a substitute of long-term constructing blocks,” he mentioned. “That habits can quietly erode returns.”
Over the previous 10 years by means of 2024, buyers in U.S. open-end funds and ETFs hurt returns by trading, based on a Morningstar report launched in August.
On common, these buyers earned 7%, which was lower than the funds’ 8.2% combination annual whole return. That 1.2 share level “investor return hole” was as a consequence of poorly timed shopping for and promoting, the report discovered.
