A conversation with a Brazilian investor revealed a common misconception about investing in Exchange-Traded Funds (ETFs). The investor was pleased with his decision to diversify his investments in foreign markets by purchasing three different ETFs: IVV, VOO, and SPY. He felt confident about the risk distribution and returns, thinking that having different fund names equated to having a diversified portfolio. However, upon further inquiry, it became evident that all three ETFs tracked the same underlying index, indicating he was essentially investing in one fund divided into three parts.

This realization underscores a broader trend in investment behavior, particularly among those new to international investing. For many years, investing abroad appeared daunting because it usually required in-depth knowledge of specific companies and sectors. Many investors were overwhelmed by the task of assessing performance and managing risks associated with individual stocks. ETFs have changed this landscape by providing access to diversified indices without the necessity of selecting individual stocks, but it has also led to a misunderstanding of what true diversification means.

The incident serves as an important reminder for investors to thoroughly understand the products they are engaging with, especially when it comes to passive investment strategies that appear simplified on the surface. The misjudgment made by this investor highlights the need for better financial education and awareness around the nature of ETFs and their underlying indices, ensuring that investors are genuinely diversified in their portfolios rather than unknowingly concentrated in one index, even if it is spread across multiple funds.