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Demand for exchange-traded funds continues to grow as investors seek lower-cost, tax-friendly options to meet their financial goals. But missteps can happen, experts say.
ETFs brought in $540 billion in new money during the first half of 2025, which exceeded total inflows for the same period in 2024, according to Morningstar. Meanwhile, companies have launched 464 new ETFs through June, which could pass the 2024 record of more than 700.
“The rise of ETFs has been great for investors, but convenience can also breed complacency,” said certified financial planner Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida.
“The biggest mistakes” aren’t about the products, but how investors use them, he said.
Here are some pitfalls to know before pouring money into new ETFs, experts say.
Investors should ‘look under the hood’
Some investors assume all ETFs are the same, without considering the underlying assets, according to Jared Gagne, a CFP with Claro Advisors in Boston.
For example, some ETFs track broad indexes, like the S&P 500, while others, such as sector funds, invest in a specific industry or part of the economy, he said. Others could include thematic ETFs, focusing on themes or trends, or leveraged ETFs, with derivatives that amplify profits and losses.
“If you don’t look under the hood, you may think you’re buying a diversified fund when in reality you’ve bought something extremely narrow and risky,” Gagne said.
‘Chasing performance’ can be costly
Like any investment, your ETF picks should match your risk tolerance, goals and timeline, experts say.
But a common mistake is “chasing performance” based on past returns, which may not continue, according to CFP Michael Lofley with HBKS Wealth Advisors in Stuart, Florida. He is also a certified public accountant.
Ulin said many investors “rush into buzzworthy ETFs” like bitcoin, cannabis or clean energy after seeing a rally. But “these funds can fall just as quickly as they rose,” he said.
You can ‘erode returns’ with frequent trading
One of the benefits of ETFs is the ability to buy and sell the assets throughout the day, similar to a stock. But some investors trade too often, Gagne said.
“The beauty of ETFs is low cost and tax efficiency, but investors often treat them like trading vehicles instead of long-term building blocks,” he said. “That behavior can quietly erode returns.”
Over the past 10 years through 2024, investors in U.S. open-end funds and ETFs hurt returns by trading, according to a Morningstar report released in August.
On average, these investors earned 7%, which was less than the funds’ 8.2% aggregate annual total return. That 1.2 percentage point “investor return gap” was due to poorly timed buying and selling, the report found.