How Many ETFs Should You Have in Your Portfolio?

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Investment advice can start to feel overwhelming fast. It gets worse when financial experts throw around terms you don’t understand.

One term you should definitely know is exchange-traded fund, or ETF. These are simply funds that own many investments, such as a specific type of stock, or a collection of bonds, or even gold.

Many already come with plenty of diversification baked in, which raises the question: How many ETFs do you actually need in your portfolio?

Like most financial questions, the answer is: “It depends.”

Control vs. Simplicity

One one extreme of the spectrum, you could invest in a single ETF and call it a day.

Seriously — the Vanguard Total Stock Market ETF (VTI) offers broad exposure to the U.S. stock market. That includes all business sectors and all market caps (company sizes). An investor who only wants to invest in the U.S. stock market could get away with just owning a single ETF in their portfolio.

If you wanted to add foreign companies into the mix, you could add shares of Vanguard FTSE All-World ex-US ETF (VEU).

So why doesn’t everyone just invest in one or two ETFs to keep their portfolio simple?

Some investors want more fine-tuned control over their portfolio. Perhaps they want to put more money toward small-cap U.S. stocks, or toward stocks in emerging markets.

The more ETFs you add to your portfolio, the more control you have over your asset allocation. Take that desire for detailed control even further, and you can invest in individual stocks.

The Downside to Too Many ETFs

Everyone likes more control. But control comes at a cost.

First, it adds complexity to your portfolio. What might start as four or five ETFs could easily grow to 40 or 50. You log into your account one day and realize you have more investments than you can easily keep track of at a glance.

Adding more ETFs to your portfolio also adds to the risk of unintended overlap. Several of your ETFs likely own the same companies. What started as a bid for control could actually leave you over-exposed to a few giant companies like Apple, Microsoft or Alphabet.

Finally, more ETFs usually mean more fees. The simplest, broadest ETFs usually charge almost nothing in fees. For example, the Vanguard Total Stock Market ETF charges an expense ratio (annual fee) of just 0.03%. Meanwhile, the Vanguard FTSE All-World ex-US ETF charges just a little more at 0.07%. As you invest in narrower, more niche ETFs, expect expense ratios to rise.

Beyond Stocks

One or two ETFs could work if you only want to invest in stocks. But what if you want to invest in bonds as well? Precious metals? Real estate?

You can invest in ETFs that give you broad exposure to any of these investments. And, of course, they add to the total number of ETFs in your portfolio.

It all comes back to simplicity versus control over your portfolio.

Contrarian Take on Index Funds

Many ETFs mimic certain stock indexes, such as the S&P 500 for U.S. large cap stocks or the Russell 2000 for similar small cap stocks. These offer diversification at a low expense ratio.

But some financial experts have started expressing concerns about too many retail investors just blindly investing in index funds. Regardless of your personal opinion of Elon Musk, he has raised several thoughtful warnings about index funds.

One concern centers around them blindly throwing too much money at the largest companies in the world, based on how stock indexes are weighted. One option — if you want to reduce your exposure to a few mammoth corporations — is to invest in equal-weighted funds, offering equal exposure to all companies in the fund rather than weighting by market cap.

Even so, ETFs offer an easy way to diversify your portfolio at little cost. When in doubt, schedule a flat-fee phone call with a financial advisor to get expert insights into how to invest to achieve your personal goals.

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