News & Trending Investing News

7 ETF Mistakes That Can Quietly Eat Away At Long Term Returns

Exchange-traded funds can be powerful wealth-builders, but small missteps can quietly erode your returns over time.

By Adam Palasciano

Edited by Laura Hohenstein

Updated Nov. 28, 2025

Exchange-traded funds (ETFs) have become one of the most popular ways to build wealth, especially for those looking to start investing with low costs and broad diversification. They offer exposure to hundreds of stocks or bonds in one simple trade, but that simplicity can be deceiving. Even disciplined investors can fall into subtle traps that chip away at long-term returns.

Understanding how ETFs work — and where investors often go wrong — can help you avoid costly mistakes and keep your portfolio on track.

Get a protection plan on all your appliances

Did you know if your air conditioner stops working, your homeowner’s insurance won’t cover it? Same with plumbing, electrical issues, appliances, and more.

Whether or not you’re a new homeowner, a home warranty from Choice Home Warranty could pick up the slack where insurance falls short and protect you against surprise expenses. If a covered system in your home breaks, you can call their hotline 24/7 to get it repaired.

For a limited time, you can get your first month free with a Single Payment home warranty plan.

Get a free quote

What is an ETF?

An exchange-traded fund, or ETF, is an investment fund that holds a collection of assets — such as stocks, bonds, or commodities — and trades on an exchange like a stock. Each share represents a slice of the fund's holdings, giving investors instant diversification without buying every asset individually.

ETFs are structured to track an index, sector, or theme, offering a flexible and typically low-cost alternative to mutual funds. They can be bought and sold throughout the day, making them accessible to investors of all experience levels.

Who really has the cheapest auto insurance in your area? Check your zip code here.

ETFs are growing in popularity

Demand for ETFs continues to surge as investors seek lower-fee, tax-efficient ways to meet their financial goals. In fact, ETFs brought in $540 billion in new money during the first half of 2025, surpassing total inflows for the same period in 2024, according to Morningstar and as reported by CNBC.

So far, companies have launched 464 new ETFs through June 2025, putting the market on pace to break 2024's record of more than 700 new funds. But with this growth comes complexity — and with complexity, more room for error.

Common mistakes people might make when investing in ETFs

While ETFs are designed for convenience, they're not foolproof. Investors may assume that owning an ETF guarantees diversification and strong returns, but that isn't necessarily always true. Small oversights — from ignoring fees to chasing performance — can quietly eat away at gains.

Not considering the assets within an ETF

One of the biggest mistakes is not "looking under the hood." According to CNBC, investors sometimes buy ETFs without understanding what the fund actually holds. Two funds tracking similar indexes can have vastly different holdings, sector weights, or risk levels.

Before buying, review the fund's prospectus or fact sheet to understand its top holdings, asset allocation, and underlying costs. Knowing what's inside helps ensure the ETF aligns with your risk tolerance and investment goals.

Buying and selling ETFs too often

Frequent trading can potentially erode returns through transaction costs, taxes, and missed compounding opportunities. Experts cited by CNBC warn that investors who jump in and out of ETFs often underperform those who simply hold steady.

ETFs are best suited for long-term investors who let time and compounding work in their favor. By staying the course, you can minimize costs, reduce emotional decision-making, and give your portfolio time to grow.

Chasing after ETF performance without looking closely at the fund

It's tempting to buy into the latest "hot" ETF that's outperforming the market, but as CNBC

points out, chasing returns rarely works out long-term. The best-performing ETFs in one year can underperform the next year.

Instead of buying based on past performance, evaluate an ETF's strategy, holdings, and long-term consistency. Diversification and patience tend to produce steadier results than performance-chasing ever will.

Grow Your $$: 11 brilliant ways to build wealth after 40

Not paying attention to fee structures

An ETF's expense ratio may look low — say it's under 0.20% — but costs can differ dramatically between funds. Overlooking fees and liquidity is a major pitfall for investors, as even small fees can add up over time.

Compare expense ratios, trading spreads, and commission costs before investing. Prioritize funds with low costs and high liquidity to maximize the amount of your money that stays invested and compounding.

Not considering tax liability

Another overlooked mistake involves tax planning. While ETFs are generally tax-efficient, they're not entirely tax-free, as distributions and capital-gain payouts can trigger tax liabilities.

Investors in high-income brackets should consider holding taxable ETFs in retirement accounts or exploring tax-managed options. Awareness of how and when gains are realized can help you keep more of your earnings.

Ignoring portfolio overlap

With hundreds of ETFs on the market, it's easy to unknowingly buy multiple funds that hold the same stocks. Overlap can dilute diversification and increase exposure to specific sectors or companies.

Before adding a new ETF, check its top holdings to ensure it complements — not duplicates — your existing portfolio. True diversification comes from owning distinct asset classes, not just different tickers.

Get instant access to hundreds of discounts

Over 50? Join AARP today— because if you’re not a member you could be missing out on huge perks like discounts on travel, dining, and even prescriptions.

Get 25% off membership — just $15 for your first year with auto-renewal — and a free gift if you join today.

Become an AARP member now

Forgetting to rebalance

Over time, market movements can shift your portfolio away from its target allocation. Rebalancing — selling portions of funds that have grown too large and reinvesting in underweighted areas — helps maintain your desired level of risk.

Skipping this step can leave you too heavily weighted in stocks during downturns or too conservative during rallies. A periodic review, such as once or twice a year, can help keep your ETF mix aligned with your long-term goals.

Bottom line

ETFs can be an excellent way to build wealth, but as with any investment, details matter. Understanding what you own, keeping costs low, managing taxes, and staying disciplined all play a role in protecting long-term returns.

By sidestepping these common missteps and approaching ETFs with clarity and patience, you'll strengthen your investing foundation — and boost your financial fitness for the years ahead.

More from FinanceBuzz: