ETFs have grown in popularity in the last decade, and beginner investors are often encouraged to consider them. But beginner doesn’t mean foolproof and even investments like ETFs can go wrong when investors don’t know what they are really buying and how best to use them. It’s also worth noting that beginner doesn’t mean that ETFs can’t be part of more sophisticated strategies either.
Some of the most common mistakes that ETF investors can make include:
At the end of the day, investors need to do their research on ETFs just as much as they would on any other type of investment – it may be an easier investment product for beginners to start with, but it still requires you to put time and energy in to make the right choices.
The good news is that if you know what to look out for, you are more likely to invest in the right ETF for your portfolio.
One of the big selling points for ETFs is the idea of instant diversification. In one trade, you have exposure to many assets or companies.
For example, purchasing the SPDR S&P 500 ETF (ASX: SPY) gives you exposure to all 500 US companies in the S&P 500 index weighted by company size (market capitalisation), compared to only being able to afford, say, one or two company shares for the same price as one unit of the ETF.
But true diversification using ETFs across your portfolio is not guaranteed. You need to look within the indices of the ETFs you want to buy to ensure you really are getting diversification for your portfolio and not concentrating your portfolio in one region.
Let’s say you purchased one ETF that tracked the S&P 500 and wanted to add diversification to other parts of the world by purchasing an ETF that tracks the MSCI World. You may find you aren’t as diversified as you had hoped and are concentrated towards the US.
Looking at both those indices, you’ll find that the MSCI World index is weighted 72.4% towards the US and will also hold all the companies in the S&P 500. Taking it a step further, both indices hold Nvidia as their largest constituent – it represents 5.64% of the MSCI World and 7.9% of the S&P 500 index at the end of May 2026.
If this concentration was a concern, you may need to rethink your purchases – perhaps you’d select a global index that excluded the US, or perhaps you’d simply select a broad global index and not also invest in a US-specific index.
This diversification issue is not exclusive to regional investing either. Say you were interested in a particular theme like robotics and found ETFs that focused on this theme. You may find cross-over in the underlying holdings so may not need both.
Action: Take the time to look at the underlying investments of the ETFs you are considering and also how they fit against your other investments to avoid being overly concentrated in one type of asset, region or sector.
ETFs are often considered cost-effective investments and, depending on what type of ETF you select, can be cheap. But investors should not just assume the cheapest ETF is the best.
There are two aspects to the concept of being cheap:
ETFs generally trade close to the net asset value (that is the value of the underlying holdings) – ETFs built up of more expensive companies will have a higher unit price than those built up of cheaper companies.
On this basis, it is possible for two ETFs which follow the same theme, sector or region to be vastly different prices depending on what underlying assets they each hold and what size allocations. For investors looking at a particular theme, they should consider which underlying holdings better suit their strategy before purchasing – it could be the cheaper option or could be the more expensive one.
ETFs are often assumed to be universally cheap when it comes to fees too – this is a myth, some are cheap with fees as little as 0.03% but others can be expensive, with fees above 1% or even additional performance fees. This view of cheapness comes from the historical use of ETFs as broad-based index trackers which are typically cheaper to operate. These days, ETFs come in a range of styles. Passive options still exist, but some may use more tailored styles of index tracking which can come with added expenses. There are also actively managed ETFs, which typically come at a higher cost compared to passive funds.
Action: Take the time to look into underlying holdings and the way a fund is managed to assess both unit prices and management fees when comparing ETFs to invest in. In some instances, the cheapest option may be the best – for example, if you are investing in ETFs that both follow the same broad-based passive index and one has a cheaper management fee. At other points, you may find paying a slightly higher fee is worth it if you are looking for specific tailoring or active management to suit your particular investment strategy.
A mistake not just exclusive to ETFs, it’s easy to get caught up in past performance. Markets are cyclical so just because one particular asset has outperformed in one year doesn’t mean it will in the next. This year’s top-performing ETF could be next year’s worst depending on market conditions and other factors so don’t just buy based on performance.
Action: As with other investments, look at performance over time and across cycles. If you are looking at ETFs with active management that may be newly listed, it can be valuable to look at the fund manager’s track record in similar strategies, such as any unlisted funds they also offer. Newer ETFs that follow a specific trend or theme with a tailored index can be harder to assess. In this case, you may want to look through the strategy and holdings, as well as consider the long-term prospects of the particular trend or theme the ETF is following. Meme stocks may be short-term for example, while structural themes like energy might offer you more longevity.
This mistake often ties in with investing purely based on a catchy ticker – after all, there’s a lot of great ticker codes in the ETF industry.
Knowing and understanding what you have invested in is one of the key tenets of being a good investor so that you have full awareness of the risks you might be taking on, how your investment will interact with other parts of your portfolio and what results you might expect from that particular investment. If you have a particular moral view you want incorporated in your portfolio, this is critical to avoiding investments that conflict with those moral views. It also means you really have invested in what you hoped for.
Consider an example where you want to invest in an ETF with exposure to cryptocurrency, a higher risk investment – there are a few listed options for this in Australia. You might start looking at Betashares Crypto Innovators ETF (ASX: CRYP). If you didn’t take the time to take a closer look at the strategy and only glimpsed at the name, you might not realise that it doesn’t invest directly in cryptocurrencies but rather companies that are involved in the crypto economy – so it is exposed to cryptocurrency but more indirectly. This might actually be exactly what you are after, but if you specifically wanted direct bitcoin exposure, you might need to look for other options, such as Global X Bitcoin ETF (CBOE: EBTC) for direct bitcoin exposure.
Action: ETFs are like any other investment. You need to read through the product disclosure statements and look through the strategy and holdings to make sure the one you are considering actually matches with your strategy and needs.
Once upon a time, you could bank on an ETF being a very simple index-tracking investment – no real surprises, just automated trading to match a broad-based index like the S&P/ASX 200. These days, there’s a variety of options and knowing this is valuable because you may find a better option to suit your strategy than just sticking to the first ETF to appear.
There are passive options which can also vary. There’s still those ETFs which track the large indices but there are also more tailored options (you may hear the term smart-beta) too. These carry different risks and may perform differently in your portfolio and might follow specific criteria like value or quality, use different weightings, such as equal-weighted strategies or filter for characteristics like dividend yield. They can also have different costs.
You’ll also find many actively managed options available too where the ETF isn’t tracking an index, but rather the investments are managed by an active fund manager who selects and identifies the assets. Fees can be higher in actively managed options compared to passive options.
There are also geared or leveraged ETFs which are typically classified as an actively managed option but look different to the actively managed funds discussed in the last paragraph. These investments carry higher risk and are often designed to be short-term trading tools for sophisticated investors. They can come at a higher management cost too. They require active monitoring on the part of an investor and many an investor has failed to understand their workings and lost money treating them as a buy and hold investment in the past. Beginners shouldn’t make the mistake of assuming these are easy to use and can sit in a portfolio for extended periods – they require extensive investment expertise.
Action: Go back to your strategy to understand what you specifically need and are looking for to help you narrow down and investigate options. Consider whether you prefer passive investments or are open to actively managed options and be sure to compare like with like – comparing a broad-based index ETF with a concentrated actively managed share ETF will not give you a true picture of the right option.
If you are considering passive investments, take the time to consider whether a broad-based index is the right approach, or if you need something more tailored – remember that simple can be the best option in some circumstances and other times, it may be worth using a more complicated strategy.
ETFs can be an easy and efficient way for beginners (and more experienced investors) to invest.
Avoiding the common mistakes really comes back to doing your research on your options, considering your overall investment strategy and understanding what and why you are investing in.
Taking the time to do your due diligence on ETFs can offer you a diversified high-quality portfolio – and if you can’t find the right option today, there’s always new listings coming so you can take your time for the right strategy.
The SPDR® S&P 500® ETF seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index.
CRYP aims to track the performance of an index (before fees and expenses) that provides exposure to global companies at the forefront of the dynamic crypto economy.
Invest in Bitcoin, the best performing asset in the past decade.
Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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