ETF investing mistakes that investors should avoid

ETFs, or exchange-traded funds, track the performance of a specific index, sector, commodity, or asset class. They operate much like stocks, meaning they can be bought and sold on an exchange throughout the trading day, with prices changing in real time.

Lack of precise strategy and discipline in ETF investing
What does a good strategy look like?
ETF investing mistakes: failure to understand that ETFs are just a wrapper
High expectations of returns from ETF investing
ETF investing mistakes: portfolio complications
ETF investing mistakes: failure to consider costs
ETF investing mistakes: currency risk
Summary

Investing in ETFs is becoming increasingly popular among both beginners and experienced investors. ETFs are often seen as an easier and more cost-effective way to build an investment portfolio. However, despite their many advantages, investors frequently make mistakes that can limit profits or even cause losses. In this article, I will discuss the most common pitfalls investors encounter and offer advice on how to avoid them.

If you are new to ETFs, I recommend starting with the basics in this article: link

Lack of precise strategy and discipline in investing in ETFs

Investing without a clearly defined strategy is one of the biggest mistakes when it comes to ETFs. Many investors make emotional decisions, reacting impulsively to current market events, which often leads to poorly thought-out moves and capital losses. It’s important to remember that ETFs are essentially wrappers for financial instruments, often representing entire indexes.

Stock market indices such as the S&P 500, MSCI World, or domestic indices like WIG20 and mWIG40 cannot go bankrupt. These indices are not individual companies but baskets of shares from various firms. Their purpose is to reflect the overall condition of a specific market. When a company in the index goes bankrupt or declines in value, it is replaced by a more stable one. This continual updating helps maintain the index’s integrity. While the index value may fall during a crisis, it does not mean the index itself is failing — it simply mirrors the changing state of the economy it represents.

What does a Good strategy look like?

A good investment strategy requires a clearly defined goal. This includes setting the time horizon for your investment and developing a risk management plan. Discipline is key — knowing when and how to respond to market changes helps maintain this discipline. Sticking to your plan, even during volatile market periods, is essential when investing in ETFs.

It’s important to create a detailed investment plan and follow it consistently, regardless of market noise. Regularly review your strategy, but avoid making hasty changes in response to short-term market fluctuations.

ETF investing mistakes: failure to understand that ETFs are just packaging

While ETFs may seem straightforward, not every investor fully understands what assets lie behind a particular fund. Lack of knowledge about an ETF’s composition can lead to improper capital allocation.

For example, an emerging markets ETF might look appealing, but does the investor know which countries and sectors dominate its portfolio? Are they aware of the geopolitical and economic risks involved?

Before purchasing an ETF, thoroughly analyse its composition and investment strategy. Make sure the fund’s structure aligns with your investment goals. Regularly review fund reports to stay informed about how the portfolio is evolving.

High expectations for ETF returns

Many investors, after seeing the historical returns of ETFs, develop high expectations for future gains. However, financial markets are inherently volatile and do not always replicate past performance.

Assuming that returns will consistently remain high can lead to disappointment and impulsive investment decisions. It’s crucial to acknowledge the risk of market corrections and be prepared to use such downturns as potential investment opportunities.

Make realistic assumptions about returns and be ready for extended periods of weaker performance. Focus on a long-term investment horizon and avoid trying to „beat the market” in the short term. Remember, the goal of an ETF is to closely track the underlying index or asset, not to outperform it.

ETF investing mistakes: portfolio complexity

A common mistake investor make is overcomplicating their portfolios. Some try to maximize diversification by purchasing too many ETFs, which can lead to overlapping exposures to the same markets or sectors. This not only diminishes portfolio efficiency but also increases transaction costs.

Instead, prioritize simplicity and clarity in your portfolio. Opt for ETFs that offer broad diversification, such as global equity ETFs. Regularly review your holdings to identify overlapping exposures and ensure you are not unintentionally duplicating investments.

Mistakes when investing in ETFs: not paying attention to costs

Costs associated with investing in ETFs—such as commissions, annual fees (TER), currency conversion charges, and taxes—can significantly impact your overall investment returns. Unfortunately, many investors tend to overlook these expenses, focusing solely on potential profits.

Key costs to consider:

Brokerage fees: Frequent trading can quickly add up in commissions. Plan your transactions carefully to minimize costs. ETFs are ideally suited for passive, long-term investing, which helps reduce trading frequency.
TER (Total Expense Ratio): This is the annual fee the fund charges for managing its assets. Choosing ETFs with a low TER can help improve your net returns over time.
Currency conversion costs: If you invest in ETFs denominated in foreign currencies, be mindful of the costs involved in currency conversion. Sometimes, purchasing currency through an online exchange might be cheaper than relying on your broker’s conversion rates. Alternatively, consider investing in ETFs listed in your local currency if currency conversion costs are too high.
Taxes: Tax obligations such as dividend taxes or capital gains taxes vary by jurisdiction. Before investing in a particular market, it’s important to understand the tax implications that apply to you.

For a deeper dive into how costs can affect your investments, check out this article: link

Mistakes when investing in ETFs: currency risk

Currency risk is a frequently overlooked factor when investing in ETFs. It arises when an ETF holds assets denominated in foreign currencies, while your investments are valued in your local currency. Fluctuations in exchange rates can significantly affect your overall returns. For instance, if the foreign currency depreciates against your base currency, you might experience losses or reduced profits—even if the value of the ETF’s underlying assets has increased.

Currency risk becomes especially important during periods of high volatility in currency markets, often triggered by political, economic, or global events. To mitigate this risk, investors can consider currency-hedged ETFs, which aim to neutralize the impact of currency fluctuations, though these often involve additional costs.

Diversifying your investments across multiple currencies is another effective way to reduce exposure to currency risk.

For more information on ETFs and related risks, I recommend this website: https://atlasetf.pl/

Summary

With a little effort and commitment, mistakes when investing in ETFs can be easily avoided. ETFs are a powerful investment tool, but their effectiveness depends on a conscious and thoughtful approach. They are ideal for beginners. You can—and sometimes should—use this instrument to diversify your investment portfolio. For example, you can combine ETFs with investments in bonds.

By avoiding the mistakes described, you will increase your chances of achieving satisfactory investment results. Remember, the key to success is education, discipline, and common sense.

We encourage you to visit our website regularly and expand your knowledge.