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Exchange-traded funds (ETFs) have become popular among investors. A fund can hold hundreds of stocks at a fraction of the cost of a traditional mutual fund, which may help explain why U.S.-listed ETFs had about $14.21 trillion in assets as of early 2026. Investment Company Institute.
But not all ETFs may be eligible for a spot in your retirement account. Making the wrong choice could mean paying more fees than you realize, dealing with the volatility associated with any one industry, or seeing dwindling returns from a fund designed for day traders.
Also see the best S&P 500 ETFs to watch or invest in right now.
Not all ETFs are the same
Two funds can track the same index and still have very different costs.
For example, the Vanguard S&P 500 ETF (VOO) charges an expense ratio of 0.03%, while the SPDR S&P 500 ETF Trust (SPY) charges 0.0945%.
“Investors should look beyond the index and consider other factors such as fees, liquidity and how they plan to use the ETF,” said Mingyuan Kong, an assistant professor at Harvard Business School. School of Management, New York Institute of Technology. “Over long retirement horizons, small fees can make a significant difference for investors.”
Leveraged and Futures ETFs
These types of ETFs are made for short-term trading, not 401(k). Leveraged ETFs magnify daily returns and reset each day, meaning long-term results may not look the same as the index they track.
“The two types of ETFs I would advise investors to be careful with are leveraged ETFs and ETFs that use futures contracts,” said Zachary Mineur, chief investment officer of ETFs. Independence Square Consultants. “Holding them for longer periods may reduce returns relative to the underlying asset or index.”
thematic etf
Funds linked to artificial intelligence (AI), clean energy and other trending sectors have grown manifold in recent years. But they can often concentrate investors’ stakes in a single industry.
“A flashy theme or a rock-bottom fee is not a strategy,” said Jack Fu, CEO of . draco evolutionWhich manages AI-powered ETFs. “Everyday investors should see transparency in how decisions are made, not just how low the expense ratio is.”
Editor’s Note: This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including possible loss of principal. Always consider your individual circumstances and consult a qualified financial advisor before making investment decisions.