Exchange traded funds are considered an easy way to get started investing. But how many ETFs does a balanced portfolio actually need?
• An ETF can be sufficient, but is often not enough for true global diversification
• Two to three ETFs form a sensible basic portfolio for many investors
• Too many ETFs can unnecessarily complicate the portfolio and lead to overlaps
The question of the right number of ETFs is important for the investment strategy. Putting everything on one card can lead to increased risks when investing. Nevertheless, many private investors, for example in forums like the Finance subreddit, swear by the supposed “holy grail”: a single ETF that represents the entire portfolio. But is this approach really worth it – or do several building blocks make sense?
Why a single ETF is often not enough
The answer is less clear than it first seems. A single ETF provides some diversification, but according to extraETF, an MSCI World, for example, is heavily concentrated in the USA. US companies account for more than two thirds of the fund volume, and large technology companies such as Apple and Microsoft also dominate. This can lead to cluster risks, even if the ETF appears broad at first glance.
A report from beatvest shows that a single ETF does not fully reflect global economic performance. Emerging markets hardly play a role in the MSCI World. Anyone who relies exclusively on an industrial country index is foregoing potential growth opportunities in Asia, Latin America or Africa. Regional or sectoral dependencies can only be controlled to a limited extent with just one fund.
What a sensible ETF combination can look like
Many investors therefore opt for a basic structure that is easy to implement. According to extraETF, the 70:30 split has become established, in which an ETF on industrial countries such as the MSCI World is combined with an emerging market ETF such as the MSCI Emerging Markets. This model covers a large part of the global market capitalization and reduces the dependence on individual markets.
According to beatvest, beginners in particular often prefer an even simpler solution. An ETF on the FTSE All-World or the MSCI ACWI already combines industrial and emerging markets in one product. If you want to diversify a little more deeply, you can add additional components, such as an ETF on smaller companies, a bond ETF or a commodity ETF to reduce fluctuations. However, more than four to five ETFs are usually not necessary for most private investors, otherwise the portfolio can become confusing.
The right number depends on your personal strategy
There is no general answer to how many ETFs make sense in a portfolio. According to extraETF, the optimal number depends on factors such as risk tolerance, investment horizon and personal level of knowledge. A portfolio that is too complex can make rebalancing difficult and carries the risk of unintended overlaps. However, too few building blocks can affect the spread.
Beatvest emphasizes that what is particularly important is being able to maintain your own strategy in the long term. For many investors, a global ETF can already provide a suitable basis. Two ETFs allow for more flexible weightings. Additional building blocks can be useful if there are clear goals behind them and the structure remains clear.
In the end, what matters most is that the portfolio is globally diversified, transparently structured and easy to manage. Less can often be more when it comes to investing, as long as diversification is guaranteed.
Editorial team finanzen.net
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