Prasit Photograph | Second | Getty Pictures
Demand for exchange-traded funds is hovering as traders shift to lower-cost, tax-friendly options which are simpler to purchase and promote. However many individuals do not know what they’re buying, and mistakes may harm their returns, monetary specialists say.
The ETF market has surpassed $11 trillion, close to a file excessive, with $511 billion of inflows through the first half of 2025, Cerulli Associates, a monetary companies analysis agency, reported this week.
Nonetheless, “we’re seeing some frequent errors that may quietly erode long-term returns,” stated licensed monetary planner Jay Spector, co-chief govt officer of EverVest Monetary in Scottsdale, Arizona.
Traders may quickly see even more ETFs after regulatory selections from the U.S. Securities and Trade Fee in late September. One of many rulings may spark a wave of recent ETF share lessons of mutual funds.
Because the ETF market grows and extra merchandise emerge, it is vital to know how every asset may affect your monetary targets, advisors say.
Within the meantime, listed here are among the key ETF errors to keep away from.
Following the ‘herd mentality’
One of many greatest ETF missteps is “chasing efficiency,” which regularly includes the “herd mentality” of following different traders by funneling cash into rising property, in response to Spector.
In some instances, shoppers purchase ETFs when they’re performing effectively, with out contemplating how the funding aligns with their long-term monetary targets, he stated.
Chasing scorching themes and ‘development hopping’
One other frequent mistake is following the plenty to scorching ETF themes or “development hopping,” stated CFP Patrick Huey, proprietor of Victory Unbiased Planning in Portland, Oregon.
“It is tempting to leap into the most recent AI, crypto, or thematic ETF after massive headlines,” he stated. “However these funds are sometimes narrowly targeted and unstable.”
When you purchase when the ETF peaks and promote because it declines, “you are lacking the true advantage of regular, diversified publicity,” Huey stated.
Ignoring ETF expense ratios
One other massive error is pondering all ETF prices are the identical, in response to CFP William Shafransky, a senior wealth advisor with Moneco Advisors in New York.
“I see this on a regular basis with new consumer portfolios,” and plenty of traders may personal the identical index, such because the S&P 500, at a decrease expense ratio, he stated.
Broad market index ETFs that monitor the S&P 500 typically have an expense ratio under 0.05%, Morningstar reported in July. However some funds cost extra.
“The [higher] value could seem insignificant at first, however that additional payment drag in your return provides up over time and will translate into misplaced cash,” Shafransky stated.
