There Are Now More ETFs Than Stocks. Here’s How to Pick a Good One.
It would be an understatement to say that exchange traded funds (ETFs) have transformed the way that everyday investors access financial markets. What was once seen as a way for professional money managers to create thematic bets and add sector tilts to otherwise vanilla portfolios can now be executed with small dollar amounts in any brokerage account and a single ticker symbol.
For investors who do not have the time, training, or inclination to track and trade individual stocks, ETFs offer efficiency among other things. Rather than researching 25 semiconductor companies, you can, for instance, gain exposure to the industry through one fund. But while ETFs make investing easier, conducting due diligence is critical. In fact, their simplicity and convenience can sometimes lull investors into doing far less research than they otherwise would.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
Thematic investing revolves around identifying long-term structural shifts (e.g. artificial intelligence, cybersecurity, clean energy, etc.) and positioning capital accordingly. The challenge, historically, has been implementation.
Imagine an investor who believes artificial intelligence (AI) will reshape global productivity. Choosing the “right” AI stocks requires analyzing earnings reports, evaluating revenue projections, assessing competitive advantages, and continuously monitoring new developments. That in itself is a full-time job.
But an ETF focused on the AI revolution simplifies the process. The fund manager handles stock selection, rebalancing, and portfolio construction, while investors gain diversified exposure to the theme without betting the farm on one company’s execution.
The same principle applies across sectors. Investors seeking exposure to cybersecurity, for example, may prefer a cybersecurity ETF rather than attempting to track dozens of rapidly evolving software providers. Convenience should not, however, take the place of prudence.
A simple comparison among three well-known cybersecurity ETFs—HACK, CIBR, and BUG—illustrates why looking under the hood matters. While all three funds market themselves as vehicles for investors to gain exposure to cybersecurity stocks, their top holdings tell slightly different stories.
In recent portfolio disclosures, both HACK and CIBR have included large, diversified cyber-adjacent businesses whose revenues extend well beyond pure-play cybersecurity services among their top five positions. BUG, however, has tended to concentrate its top holdings more narrowly in standalone cybersecurity companies whose core business is directly tied to digital threat protection.
For an investor seeking targeted exposure to cybersecurity rather than broader technology infrastructure, that distinction is meaningful. But without reviewing the underlying holdings, one might assume these ETFs are interchangeable.
Unless an ETF is a true “set-it-and-forget-it” broad market index fund, such as one tracking the S&P 500 or the Nasdaq, investors should at minimum periodically review their top 10 holdings. Broad index funds are rules-based and designed to reflect the overall market. Their investment thesis rarely changes. Even so, thematic and sector ETFs operate differently.
Their holdings evolve as companies grow, merge, fail, or fall out of relevance. Thus, it is up to investors to regularly review their investments and ask themselves whether this ETF still reflects the original thesis that prompted their initial investment.
It is also important to consider investment turnover (or the frequency the ETF replaces its holdings). A high turnover ratio can not only increase trading costs within the fund, but it can also introduce tax inefficiencies in certain cases. That is not to say that turnover is bad. It is just one more factor that should be considered.
Some ETFs follow strict quantitative screens when making trading decisions while others rely on a committee or portfolio manager’s discretion. Neither approach is inherently superior, but it is important to review the way trading decisions are made and ensure that they align with your own personal thesis as an investor.
Another common mistake individual investors make when choosing ETFs is assuming that a strong 3-, 6-, or 12-month performance chart tells the whole story. Short-term performance often reflects sentiment, liquidity flows, or macroeconomic catalysts rather than durable fundamentals.
For example, an investor who buys into a thematic ETF solely because it had outperformed the S&P 500 over the prior six months might be stepping in at the precise moment that market enthusiasm peaks. The chart may look impressive, but performance alone should not be the only deciding factor.
ETFs have democratized access to sophisticated strategies, so much so that the number of ETFs listed on U.S. exchanges surpassed the number of U.S.-listed individual stocks in 2025. This shift is reflective of both explosive growth of ETF product launches as well as a relative decline in new stock listings over the past couple of decades.
In many ways, the rise of ETFs represents progress for individual investors. But access alone does not guarantee outcomes. The ease with which investors can buy into and sell out of an investment instrument should not replace the need to understand what they actually own. And with so many thematic investments now being marketed to individual investors everywhere they look, it is now more important than ever that they have a disciplined process for evaluating what they own, why they own it, and whether it still deserves a place in their portfolio long after the initial excitement around the theme has faded.
*************************
Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
To subscribe to the MalcolmOnMoney newsletter and receive more content like this, click here.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE