How many ETFs to have in a diversified portfolio?

Question

I was wondering how many ETFs should I consider for a well-diversified portfolio, and how can I determine if there is overlap between them? Are there tools or strategies to help identify overlapping holdings to avoid redundancy in my investments?

Answer

When considering how many ETFs to include in a well-diversified portfolio, there isn’t a one-size-fits-all answer. It largely depends on your investment goals, risk tolerance, and the market sectors you wish to cover. Generally, a well-diversified portfolio might include a mix of ETFs that cover different asset classes (such as stocks, bonds, and real estate) and geographic regions (such as local, international, and emerging markets).

To determine if there is overlap between ETFs, you can start by examining the holdings of each ETF. Overlap occurs when two or more ETFs hold the same stocks or assets. For example, if you invest in both IOZ (iShares Core S&amp;P/ASX 200 ETF) and A200 (BetaShares Australia 200 ETF), you will find a significant overlap because both ETFs aim to track the performance of the top 200 Australian companies listed on the ASX.

To identify overlapping holdings and avoid redundancy in your investments, you can use several strategies and tools:

ETF Provider Fact Sheets and Websites: Most ETF providers publish fact sheets and detailed holdings information on their websites. Review these documents to understand the composition of each ETF.

Financial News and Analysis Platforms: Websites like Morningstar, Bloomberg, or Yahoo Finance often provide tools that allow you to compare the holdings and performance of different ETFs.

Portfolio Analysis Tools: Some online broker platforms and investment tools offer portfolio analysis features that can help you identify overlap between the ETFs in your portfolio. These tools analyze your portfolio composition and highlight any redundancies.

Financial Advisors and Analyst Reports: Consulting with a financial advisor or reading analyst reports can also provide insights into how much overlap exists between your chosen ETFs and whether your portfolio is diversified effectively.

By using these tools and strategies, you can ensure that your investment in ETFs is diversified, minimizing risk and potentially enhancing your returns. Pearler, for instance, offers features that allow you to track and manage your investments efficiently, helping you to understand your portfolio’s diversification and to make informed decisions based on your financial goals.

You can find out more about this topic here: How Do I Choose Between Similar Etfs

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Olivia.

Great question.  it actually doesn’t matter how many you have – you could have 1 ETF that is a completely diversified portfolio (say DHHF or VDHG as examples), or you could have 10 different ETFs and still not be very well diversified (maybe they’re all technology and AI related for example)

I believe Pearler is working on a tool to make this easier, but to check overlap between ETFs you’ll just have to look at each one and see which countries its invested in and what the top holdings are to compare it with others in your portfolio.

Cheers, Dave

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Olivia Nguyen.

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Dave Gow - Strong Money Australia

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