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INVESTING STRATEGY

Holding multiple equivalent ETF's to reduce risk?

I am wondering if it's overkill to think it's a good idea to 'hedge my bets' buy buying multiple ETF's which are more or less equivalent? For example, holding equal amounts of VAS and A200. I understand that the underlying assets are basically in a trust, so if there are any major issues with the ETF companies, the underlying assets/value should be returned to me... However, I'm thinking about other things, like what if, decades in the future, one fund raised fees excessively (maybe after a company take over), had technical or legal issues or something blocking distribution payments for some time or some other unforseen similar reason. Am I being overly cautious? Are my concerns not really a probablem? Are there any other concerns?

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Daniel Nehl

7 October 2022

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Dave Gow - Strong Money Australia

INVESTOR

about 2 years ago

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

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Daniel Nehl

INVESTOR

about 2 years ago

Thanks for your thoughts Dave – really appreciated.
Yeah that makes a lot of sense.

Also, thanks for, and RIP FIRE & Chill.
The dynamic with yourself and Pat over pragmatic conversations was extremely motivating and unforgettable :)

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about 2 years ago

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.

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Daniel Nehl

INVESTOR

about 2 years ago

Hi Molly,
Thanks for your comment – all reality important points.
I know my question could have been worded better, but I was really wanting insight into the risks of the ETF providers themselves, as opposed to the risk of the assets they own or diversification of assets.
If you have any insights regarding this as well, that would be great.
Thanks,
Dan

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