When index funds and ETFs first came out, they were a game-changer. Finally, you could get instant diversification and a whole basket of stocks with a single click. It seemed like the perfect solution: low fees, broad market exposure, and no need to spend hours picking individual stocks.
Today, ETFs are a multi-trillion-dollar industry, and the most common advice you hear is to simply buy a low-cost S&P 500 ETF and forget about it. But this advice, which was once so sound, is starting to show some serious cracks. The very things that made ETFs so popular—diversification, low costs, and simplicity—are often myths.
As a subscriber to our stock analysis service, you're already someone who understands the value of digging deeper. You know that to achieve your financial goals, you need more than just a "set it and forget it" portfolio.
Let's break down the most common misconceptions about ETFs and show you why you're better off taking control of your portfolio—and how Obermatt can help you do it.
Myth #1: ETFs Give You True Diversification
The idea behind an S&P 500 ETF is simple: you own a small slice of 500 different companies, so if one company falters, it won't tank your portfolio. The risk is supposed to be spread out.
But this is an illusion. Most ETFs, especially those tracking the S&P 500, are not equally weighted. They are weighted by market capitalization—the bigger a company gets, the more the ETF invests in it. This has led to an extreme concentration problem.
Right now, just five companies—Nvidia, Microsoft, Apple, Amazon, and Meta—make up about 28% of the entire S&P 500. The top 10 companies account for nearly 40% of the index. That's not broad diversification; it's a concentrated bet on a few very large tech stocks.
This concentration can be dangerous. If these tech giants have a bad quarter or a market correction hits the tech sector, your entire "diversified" portfolio takes a massive hit. It’s the exact opposite of what diversification is supposed to do.
Myth #2: ETFs Make the Market More Efficient
You might think that all the trading in ETFs makes the underlying stock prices more efficient and reflective of a company's true value. But the opposite is happening.
When you buy an S&P 500 ETF, your money is invested across all 500 stocks, regardless of whether they are a good value. If a new company is added to the S&P 500, ETFs are forced to buy it, pushing its stock price up, even if there's no change in the company's performance.
This can lead to a growing disconnect between a company's fundamentals and its share price. When investors panic and sell ETFs, they sell all 500 stocks at once—the good along with the bad. This creates a cycle where prices drift further from their true value.
As an individual investor, you have the power to analyze a company's financials and decide if it's a good investment. ETFs remove that choice and force you to buy everything, the good, the bad, and the overvalued.
Myth #3: ETFs Are "Nearly Free"
ETFs often have very low management fees—sometimes less than 0.25% per year. This makes them seem like the cheapest way to invest. However, there are significant hidden costs that can eat away at your returns.
These hidden costs include:
- Bid-Ask Spreads: When the ETF buys or sells stocks, it pays a small fee on every trade. This can add up, especially for specialized or less popular ETFs.
- Market Impact Costs: When an ETF places a large order, it can push the price up (when buying) or down (when selling), costing the fund money and ultimately impacting your returns.
These costs are not included in the stated expense ratio and can sometimes be more expensive than an entire year of management fees. Over time, these small amounts can significantly erode your returns.
When you pick your own stocks, you are in control. You pay a simple trading commission and nothing else. Done wisely, managing your own portfolio can be much cheaper in the long run.
A Smarter Way to Invest
There is another option: systematic stock selection.
Wading through a sea of data can be intimidating, but this is exactly where Obermatt comes in. Our methodology combines the objectivity and discipline of index investing with intelligent, fact-based stock selection, so you can build a portfolio with true diversification. Instead of being overexposed to a handful of tech giants, you can select the stocks for your portfolio based on their fundamentals, not their market cap.
Wall Street's advantage has always been access to data, analysis, and computational power. The Obermatt Method levels this playing field. Our rank system makes institutional-quality analysis accessible to everyone, regardless of financial background. With every stock ranked on a scale of 1 to 100, it’s easy for you to see how a stock performs from different perspectives. If you value each type of rank equally, the 360° View rank gives you the most comprehensive view.
- Value: Is the stock cheap compared to its peers?
- Growth: Is the company expanding faster than its peers?
- Safety: Is its balance sheet stronger than its peers?
- Combined: What's the overall financial health?
- Sentiment: What do analysts think?
- 360° View: A complete picture of the company.
Browse through our analysis and tools to get started.