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Demand for exchange-traded funds continues to develop as traders search lower-cost, tax-friendly choices to fulfill their monetary targets. However missteps can occur, consultants say.
ETFs introduced in $540 billion in new cash throughout the first half of 2025, which exceeded complete inflows for a similar interval in 2024, based on Morningstar. In the meantime, corporations have launched 464 new ETFs via June, which might go the 2024 report of greater than 700.
“The rise of ETFs has been nice for traders, however comfort may also breed complacency,” mentioned licensed monetary planner Jon Ulin, managing principal of Ulin & Co. Wealth Administration in Boca Raton, Florida.
“The largest errors” aren’t concerning the merchandise, however how traders use them, he mentioned.
Listed below are some pitfalls to know earlier than pouring cash into new ETFs, consultants say.
Buyers ought to ‘look beneath the hood’
Some traders 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 monitor broad indexes, just like the S&P 500, whereas others, comparable to sector funds, spend money on a selected business or a part of the economic system, he mentioned. Others might embrace thematic ETFs, specializing in themes or tendencies, or leveraged ETFs, with derivatives that amplify income and losses.
“In case you do not look beneath the hood, you might suppose you are shopping for a diversified fund when in actuality you have purchased one thing extraordinarily slim and dangerous,” Gagne mentioned.
‘Chasing efficiency’ will be expensive
Like all funding, your ETF picks ought to match your threat tolerance, targets and timeline, consultants say.
However a typical mistake is “chasing efficiency” based mostly on previous returns, which can not proceed, based on CFP Michael Lofley with HBKS Wealth Advisors in Stuart, Florida. He’s additionally an authorized public accountant.
Ulin mentioned many traders “rush into buzzworthy ETFs” like bitcoin, hashish or clear vitality after seeing a rally. However “these funds can fall simply as rapidly 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 flexibility to purchase and promote the property all through the day, much like a inventory. However some traders commerce too typically, Gagne mentioned.
“The fantastic thing about ETFs is low value and tax effectivity, however traders 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 via 2024, traders in U.S. open-end funds and ETFs harm returns by buying and selling, based on a Morningstar report launched in August.
On common, these traders earned 7%, which was lower than the funds’ 8.2% mixture annual complete return. That 1.2 share level “investor return hole” was as a result of poorly timed shopping for and promoting, the report discovered.
