Holding multiple equivalent ETF's to reduce risk?

Interesting question Daniel.

It is worth thinking about things like this, so it’s good that you have. I guess the thing is, we need to weigh up how likely these things are, how much they bother us, and what impact the outcome would have.

A few thoughts on the issues raised…

— Excessive fee raises. This is wildly unlikely. In the 50 years since the first index fund was created, fees have come down across the board on a regular basis. Given low cost is essentially the business model, it would be self-destructive for an ETF company which runs the likes of A200 or VAS to jack up fees. People would just leave and they know it.

— I can’t imagine what technical or legal issues could occur, so I won’t elaborate there, but again this seems wildly unlikely. This would likely turn into a huge systemic issue because things like super funds etc, also have many billions invested with these managers. And if something odd did happen, it could even be something that affects all of them, meaning ‘hedging your bets’ may not actually give protection.

— My understanding is that these particular risks are unbelievably unlikely. But we can never say they are zero, and we can never be sure what the outcome of such things would be. Unfortunately, no matter what we invest in (or even if we don’t invest), there are risks everywhere. We can’t control for everything, and that’s just something we need to accept. It’s worth remembering that our overall investment is overwhelmingly driven by the underlying companies. If these index managers fail or run into issues, the assets can/will be transferred to another manager. Which I think is the most likely scenario in the event some large unforeseen event was to occur to a fund manager we’re invested with.

Hope that makes sense. At the end of the day, you’ve gotta do what you feel most comfortable with :)

Dave

My understanding is that the trust monies are required to be distinct from the ETF provider’s operating monies. So even if they went under for some reason, you would still have beneficial ownership, and in practice management of that trust would be taken up by another fund who would run it, transfer it or shut it down, but you would get most of your money back. And getting to that point would be very unlikely. So, in my opinion, having similar coverage isn’t worth doing.
I don’t invest directly in the ones you mentioned, but I instead diversify outside the top 10 by using an equal weight rather than market weight top 100 (MVW). That way I get less weight to banks and BHP, and equal weight to Reece plumbing and other companies that fill out the ASX 100.

Diversifying risk is about spreading your money over a range of asset classes, risk levels and countries etc. That’s because if, for example, Aussie shares are doing badly, then US bonds might be doing well (an illustrative example only!). You have a finger in a few pies and hopefully one of them is going to taste really good, even when the others have gone cold.
Holding multiple ETFs of the same product – e.g. an ASX300 index tracker – isn’t really diversifying risk because you’re exposed to the market’s ups and downs in both products. It’s kind of like having two iPhones – even if they’re slightly different models, they’re doing the same thing.
Where you might consider diversifying risk is choosing different asset classes in different markets – e.g. an international shares ETF, Australian Real Estate Investment Trust (A-REIT), an Aussie shares ETF, and maybe a thematic product, such as a US technology stocks ETF.