Before we dive into the technical details of ETF investing, I want to invite you to take a moment and honestly reflect on these 5 questions:
#1: Are you buying ETFs simply because you can’t be bothered to research individual stocks?
#2: Are you buying an ETF because it truly fits your financial goals, or are you secretly hoping it might magically double your money overnight?
#3: Do you equate ETFs with total safety, assuming you can't lose money once you buy in?
#4: Do you automatically assume every company inside an ETF is a high-quality, hand-picked winner?
#5: Do you actually know anything about the management team behind the ETF, or checked its historical performance?
Are We Investing, or Just Gambling?
I’m asking these questions because I’ve been there myself. Back when I was a total beginner, I made every single one of these mistakes. I bought stocks based on random tips because I was too lazy to do my own homework. I chased quick doubles without having the faintest idea what kind of risk I was taking on.
Here’s the reality check: even if you’re buying an ETF, taking that kind of blind approach is still gambling.
I’m not saying ETF investing is inherent gambling. What I mean is that real investing is fundamentally about risk management. You need to know your personal risk tolerance, understand the potential upside, and more importantly, respect the downside. Only then are you making a thoughtful, rational decision.
ETFs Aren't Automatically "Safe"
Not all ETFs are low-risk, and definitely not all of them are built for long-term holding. Due to market volatility, certain ETFs face real risks of delisting or liquidation.
The biggest culprits here are Inverse ETFs.
An inverse ETF is designed to move in the exact opposite direction of the market. Take Taiwan's popular index tracking fund, SPY, and its inverse equivalent, ProShares Short S&P500, as an example:
When the broader market rallies and SPY goes up, the ProShares Short S&P500 drops.
When the market crashes and SPY tanks, the ProShares Short S&P500 gains.
In short, buying an Inverse ETF is shorting the market.
Normally, shorting requires margin trading or futures accounts. But fund management companies packaged this short position into a retail ETF so everyday investors could hedge their portfolios.
For our long-term strategy, this type of product is a nightmare to hold. The biggest reason? You cannot buy and hold it long-term. Over the long haul, the stock market naturally trends upward. Holding an inverse position against a rising market practically guarantees massive losses and a very high risk of the fund getting delisted over time.
Then there are Leveraged ETFs, like Direxion Daily S&P 500 Bull 2X Shares. The "2X" means your exposure to the underlying index is doubled.
Leverage lets you control a position with less capital and amplifies your potential gains by 2x. But here’s the trap: your losses are also amplified by 2x.
If the underlying index drops and would normally cost you $100 a 2X Leveraged ETF will wipe out $200 instead. Stocks usually climb the stairs on the way up, but take the elevator on the way down. When a market drop hits during a bear market, the fall is fast and brutal.
Most retail investors freeze up and can’t react in time. Best-case scenario? You give back years of hard-earned gains. Worst-case scenario? You get hit with devastating losses that are hard to recover from. That’s why I strongly advise beginners to stay away from leveraged products—not to mention their ridiculously high management fees.
That "Basket of Good Stocks"? It Contains Garbage Too
People like to think an ETF is a curated basket of top-tier companies. But in reality, fund managers aren’t allowed to just kick out mediocre companies whenever they want.
Regulations and fund prospectuses bind their hands. Rules like "minimum investment ratios" or strict limits on "tracking error" mandate that managers stay fully invested and hold minimal cash. Prospectuses also set maximum weighting caps on individual stocks to keep the portfolio aligned with its stated mission.
Under these constraints, a manager can’t simply ditch underperforming stocks during an economic downturn. Bad companies drag down performance, but they stay in the basket anyway. Even broad-market ETFs hold plenty of mediocre businesses.
Can You Really Trust the Management Team?
An ETF is usually run by a whole team—analysts reviewing financials, traders executing orders based on rules, and compliance officers enforcing the prospectus.
But team management doesn't magically eliminate manager risk. Sometimes the fund rules tie their hands; other times, managers simply make bad calls. The only way to gauge whether a team has what it takes—or if they even stand a chance at beating the benchmark—is to look at the ETF's actual track record.
Final Thoughts
Does all this sound a bit discouraging?
Don't worry there's no need to be overly pessimistic. ETFs were originally invented to make stock market investing accessible and affordable for everyone. All you need to do is understand what you're buying before you press the buy button.
Think of it like buying food for your kids: you’d read the ingredient label carefully to make sure it's safe. Or like buying a laptop: you'd check the specs to see if it fits your needs.
Investing works the same way. Since there’s no financial advisor standing over your shoulder when you trade, it's up to you to do the digging. Find the facts that let you sleep like a baby at night, so every single dollar you invest works as hard as it can for you.
In my next post, I’ll be breaking down the true Pros and Cons of ETFs. Stay tuned!
Disclaimer: All ETFs mentioned in this article are strictly for educational demonstration purposes. This is not financial advice, nor a stock recommendation. Always do your own research before investing.
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