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The interest in exchange-traded funds (ETFs) is on the rise as investors look for budget-friendly, tax-efficient ways to achieve their financial objectives. However, experts caution against potential pitfalls that can occur.
Morningstar reports that, in the first half of 2025, new investments in ETFs reached $540 billion, surpassing the inflow from the same timeframe in 2024. Also, up until June, there were 464 new ETFs launched, breaking records from 2024.
“ETFs have been beneficial for investors, yet the ease of access can lead to complacency,” says Jon Ulin, a certified financial planner and principal of Urin & Co in Boca Raton, Florida.
The most significant errors, he points out, stem not from the products themselves but from how investors utilize them.
Experts outline several important considerations to keep in mind before investing in a new ETF.
Investors need to “look under the hood”
Jared Gagne, a CFP with Claro Advisor in Boston, points out that many investors treat all ETFs as if they’re identical without examining the underlying assets.
For instance, some ETFs track broad indexes, like the S&P 500, while others focus on specific sectors of the economy, he explains. There are also leveraged ETFs that utilize themes or derivatives to maximize gains and losses.
“If you don’t look closely, you might believe you’re investing in a diversified fund, but end up with something quite narrow and risky,” Gagne warns.
“Performance Tracking” can be expensive
As with any investment, your choice of ETF should align with your risk tolerance, objectives, and time frame, according to experts.
Michael Lofrey, a wealth advisor and CFP with HBKS in Stuart, Florida, mentions that a frequent mistake is the tendency to “chase performance” based on previous results—he is also a CPA.
Ulin cautions that many investors rush toward popular ETFs like Bitcoin or clean energy funds after observing rallies, but these investments can decline just as fast as they rise.
Frequent trading may erode your returns
One of the notable benefits of ETFs is the ability to trade them throughout the day, much like stocks. However, some investors engage in trading too frequently, according to Gagne.
“ETFs are designed for low costs and tax efficiency, yet many treat them like short-term trading tools instead of long-term investments,” he states. “That approach can gradually diminish returns.”
A Morningstar report, released in August, indicates that investors in open-ended U.S. funds and ETFs experienced an average return of 7% from the past decade up to 2024. This was below the overall fund return of 8.2%, creating a 1.2 percentage point “Investor Return Gap,” showing that excessive trading can be detrimental.
