ETF essentials · 2 minute read
What are the most common ETF mistakes?
The short answer
Common ETF mistakes include choosing from the name alone, chasing recent performance, overlooking overlap and focusing only on the TER (the stated annual fund operating charge). Most can be avoided by checking what the ETF owns, how it fits with your other investments and what it costs in total.
Why it matters
ETFs can make investing simpler, but the number of available funds can create false confidence. An ETF is a structure, not a guarantee that the investment is diversified, low risk or suitable for every purpose.
Five frequent mistakes are:
- Buying the label: assuming words such as “global”, “income” or “sustainable” have one standard meaning
- Chasing performance: choosing last year’s winner without understanding why it rose
- Duplicating exposure: owning several ETFs that hold many of the same companies
- Looking only at TER: ignoring spreads, platform fees, currency costs and tracking difference
- Using the wrong order: accepting an unexpected trading price without checking the spread
Another mistake is buying a complex product without understanding it. Leveraged, inverse, commodity and crypto exchange-traded products can work differently from a conventional long-term ETF.
A simple example
An investor adds a US ETF and a technology ETF to a global ETF because both performed strongly. The portfolio now contains more funds, but it may also contain much more of the same large US technology companies.
The number of ETFs increased. The diversification may not have.
What to check
- Can you explain what the ETF owns in one sentence?
- Does it add something different to your portfolio?
- Are you relying mainly on recent performance?
- Have you checked total cost and trading conditions?
- Do you understand the structure and main risks?
Key term explained
Performance chasing means buying an investment mainly because it has recently risen. Strong past performance can attract investors after much of the rise has already occurred.
A useful ETF choice starts with purpose and exposure—not a ranking of recent winners.