How many ETFs is too many ETFs?

Bryce: [00:01:00] Welcome back to Get Started Investing, a podcast where we answer all of your money and investing questions. My name is Bryce and today we're answering how many ETFs is too many? As always, to chat through it I'm joined by the equity buddy, Ren. How are you? 

Alec: [00:01:15] I'm very good Bryce. Very excited for this episode. Before we get started, as always, we need to remind everyone.

Bryce: [00:01:30] That's right. All the information on this show is for entertainment and education purposes only. Any advice is general. 

Alec: [00:01:35] Yes. Now we are loving the stings this year. Some may say loving them too much. Open to that discussion. But in that vein, we've got another thing as well. Anyone? I just had a question. I've got a question. That's right. When we answer your questions, we have now got a sting for that as well. And this week we have a question from Chris. He originally asked the question on the Facebook discussion group. Remember, you can always join the conversation in our Facebook discussion group. Link is in the show notes. But we love the question. We thought it was relevant for a lot of people. So, we asked him to record a voice note, and we're going to talk about it on the show. 

Em Community: [00:02:21] Hi, bros. And my name is Chris Tyler, and I have a question around ETFs. I've just started my investing journey and I've purchased a range of ETFs, around a core portfolio. I'm just wondering how many ETFs is too many? I've read a lot of things around having diversification but not having too much crossover. I don't want to say sort of what was the best balance? Hope you can answer. Thank you very much. 

Alec: [00:02:50] I love this question. It's a good one. Thank you. Chris. So how many ETFs is too many? Now I want to start with, I guess a general comment around ETFs. There are so many these days. I think there's more than 300 listed in Australia. In the States, there's more than a thousand. And depending on what broker you use, most people can buy ETFs in the US as well. So we literally have more than a thousand to choose from. But they've also become such a common product that it's really important to remember that not all ETFs are created equal. These days you can buy index ETFs which track the overall market. You know, the ASX 200, the 200 biggest Aussie stocks, the S&P 500, the 500 biggest American stocks. But that's just one category. Then there's thematic ETFs that a lot of people may be familiar with. And they'll follow an investing theme. You know, semiconductors, lithium whatever it is. And so that's a second bucket. But now there's a third bucket as well, which is becoming more and more common. And that's active ETFs. And that's literally just fund managers listing and ETF. And then investing that money as they see fit. So you know like JP Morgan has a bunch of active ETFs that invest in bonds. Or there's just individual fund managers. Munro is one that we've spoken to a couple of times on the podcast. They have an active ETF and they're just going out there and making buy and sell decisions. And so all three products have a place in the portfolio, and all three products are great. And it's great that we have access to them for low cost and low minimum investment. But they're not all created equal and they all play different roles in the portfolio. So I think that's a really important starting point, because it's not just about how many ETFs you have, but it's about what role they're playing in the portfolio. 

Bryce: [00:04:58] Yeah. Well to that point then the first question you must ask yourself to answer how many is too many is what is the goal of this portfolio? What am I trying to achieve here? And if you're just trying to create a a core portfolio that can go in the bottom drawer for 40 years, the answer to how many is too many is going to be different to if you want to be creating a, sort of a short term play, the key trends that are emerging and create a more satellite portfolio. So answering what is the goal will help you answer how many is too many? 

Alec: [00:05:34] Yeah. 

Bryce: [00:05:35] So let's use the core portfolio as an example. 

Alec: [00:05:38] So, I think most people would say the goal is just to make money. But let's no not overthink this. But then yeah, Chris mentioned in his question core and satellite. And when we generally talk about core and satellite core as you said is that bottom drawer set. And forget just dollar cost averaging for a long time. When we're talking about that with generally talking about the first bucket of ETFs I spoke about the index ETFs. So yeah let's answer that question. 

Bryce: [00:06:06] So when it comes to your core the purpose is to get global diversified exposure at as low cost as possible. That's the starting point. So then you need to look at the range of ETFs that are available and think about how can I do that. Firstly we've spoken in the show that you can do that with one single ETF out there that are available. And in one ETF you'll get global exposure very cheaply, i.e. the Vanguard Diversified High Growth or Betashares DHHF diversified high growth as well. These are ETFs that are designed to give you access to major indexes or major markets around the world. Cost effectively. Full stop.

Alec: [00:06:48] Yeah. To put that in context. So like that one answer to this question could be one is enough. And to put that in context, over on Equity Mate's Investing podcast, we're doing a new segment called Pimp my Portfolio. And we get an expert to look at people's portfolios. And one of the portfolios we got was just two ETFs. And that's great. Like if that is all you want. and it was two broad based ETFs. Dollar cost averaging that. Call it a day. and that's like that was a tick. There's nothing wrong with that as an investment strategy. Yeah. So you know 1 or 2 ETFs can be enough. 

Bryce: [00:07:23] Yes. If you then want to create your own core portfolio that has the same effect as that one broad based index you want to be finding still low cost indexes for some of the major markets. So Asia, Europe, the US, Australia, some of the major markets. And you want to have an ETF that focuses on all of those. Where it becomes too many is if you're buying different ETFs that all are essentially invested in the same underlying companies in these markets.

Alec: [00:07:55] Yeah. Yeah. So hold on. Let's just take a step back before you get into too many. You just said, you can replicate the global exposure that like a one ETF. Yeah. Maybe I think we've spoken previously on the show. You have four ETFs that make up your core portfolio USA Australia Europe and Asia. I have five: the USA , Australia, Europe, Asia and the UK. So the question is why bother with 4 or 5 if you can get it with one. 

Bryce: [00:08:31] It's all about how much exposure you want for each of the markets. If we take the Vanguard diversified high growth, what you'll actually find is 70% or thereabouts of that ETF is actually exposed to the US. And so the remaining 30% is spread across the other major markets. Whereas I want to take the approach of building my own core portfolio where I have equal or equal exposure to all major markets, and that gives a truer diversified portfolio than if most of the money is invested in the US market. 

Alec: [00:09:05] Perfect. So, another way to answer that question is if you want to build your own core portfolio, maybe four, five, six ETFs is the right amount to get global coverage. So when does it become too many?

Bryce: [00:09:25] It's when you start adding on ETFs that have not exactly but similar exposure. For example, if you're invested in the S&P 500, the 500 largest companies in the US, but you also then have a Nasdaq or Dow Jones or other US related ETFs, they're all likely to actually be invested in the same top 500 companies or thereabouts. That is where it becomes too many for the purpose of building a core portfolio.

Alec: [00:09:56] Yeah. Now, we should be clear like this. You know, it's not like you're paying double fees for that or anything like that because you pay fees on how much you invest. So it's not it's not like you're losing money. It's just you're creating an overly complicated portfolio. So yeah, I think. Yeah. It's when you start overlapping and you start buying the same things in multiple different ETFs. It's just you, it's unnecessary. Yeah. 

Bryce: [00:10:30] So that's how you can approach the index passive ETF portfolio. We're going to talk about the satellite portfolio and some of the thematic ETFs where this question can start to come to light a bit more before we do. We're going to take a very quick break. Welcome back to Get Started Investing. We're talking about how many ETFs are too many. It's a question that's coming from Chris from the Equity Mates community. Now Ren, before the break we spoke about index ETFs. How do you approach this question when we're talking about the thematic bucket?

Alec: [00:11:03] Yeah. So for both the second and third bucket that I sort of outlined at the start, thematic ETFs and active ETFs, I think of them as part of my satellite portfolio. So they don't form part of my fortnightly dollar cost averaging. That VIS is just automated set and forget I don't do anything. So this is more I'll save money. And then when I think that something interesting I'll buy it. And you know, for a thematic ETF, for example, I've owned the Betashares Cyber Security ETF for probably coming on, you know, 7 or 8 years now. Yeah. Yeah, yeah. And that's because I think the theme is really interesting. You know, governments and companies are going to be spending more and more on cyber security. It's becoming more and more integral to everyone's lives. And so I've made the decision that I think that's a theme that I want some additional exposure to. And I kind of treat that in the same way that I treat buying an individual company. It's like, does my investment thesis still hold and like, how's the ETF performing? And, are there any surprises in there in terms of which companies they've put in the ETF. And so you're doing a bit more of that, like checking on how it's going. And in that instance, I don't have a particular number where I'm like, this is the amount of thematic ETFs I want or anything like that. As a sort of general rule of thumb, I wouldn't want more than between 20 and 30 positions in my satellite portfolio, and some people might even think that's too many. But it's not like I own 30 thematic ETF. It's like, you know, between thematic ETFs, active managers and individual stocks. And so there's not a clean answer on how many is too many. But I think my rule of thumb is it would be silly to buy a thematic ETF and then buy the stocks individually as well. So for example, global X have a Fang plus ETF which owns the ten biggest US tech stocks. If I buy that ETF I'm not then going to go and buy heaps of Google and Microsoft and Apple and stuff like that because it's just like I've already got it with the ETF. Now I'm buying it again. I'm just doubling up on the same thing. And so, you know, you make a decision about which path you want to go down and then you go down that path. It's sort of my rule of thumb. Yeah. And so just sorry, I know I'm just rabbiting on here, but like a classic example of that is semiconductors. I haven't really played in semiconductors at all. I haven't bought any individual semiconductor stocks. But I own a little bit of the global X semiconductor ETF. 

Bryce: [00:13:54] Yeah. Yeah. Same. Also just to call out if you can hear rain through your headphones, it's because it's absolutely pouring out. 

Alec: [00:14:02] Pouring down. Well hoping the studio 

Bryce: [00:14:06] Anyway, I think to add to that point Ren, then finally to close out on the active or the thematic stuff is my view with this as well, is it can become too many when you're trying to have multiple ETFs in the same thematic. 

Alec: [00:14:21] Oh yeah. 

Bryce: [00:14:21] Like that is also pointless. Find the best ETF in that thematic and double down on that. Don't have an India ETF in India ETF and in India ETF from three different India three different ETF providers. Just maybe because they have slightly different holdings or whatnot, like just find what you perceive to be the best and go hard on that. 

Alec: [00:14:44] Yeah. Yeah. So I think to go back to the question: how many ETFs are too many? There's not a clean answer because it depends on how you're using them and what they're in your portfolio for. When it comes to your core portfolio. One is enough, but you're probably getting too many when you're getting above 5 or 6 because it's just like you covered all the major geographies of the world. And then when it comes to your satellite, you know, you could have 20 thematic ETFs and active ETFs if you wanted to. I would question whether there's 20 great themes and manages to invest in. But it's really about like what the purpose of it all is and how you're using them in your portfolio and what your thesis is for them in your portfolio. 

Bryce: [00:15:38] Well, that brings us to the end of today's episode. A reminder, if you'd like to ask a question, head to Equitymates.com/contacts. You can leave us a voice note there or write a question or come and join the conversation in our Facebook discussion group. But Ren, always a pleasure to chat stocks. Will pick it up next week. 

Alec: [00:15:53] Sounds good.