More ETFs does not automatically mean more diversification. A portfolio that is too complex can cause overlap and unnecessary costs.
• More ETFs in the portfolio do not automatically mean more diversification
• A broadly diversified world ETF forms a solid basis
• For most investors, one to three ETFs are enough
A solid base with a single world ETF
ETFs are not about owning as many different funds as possible. Even a well-diversified ETF offers a broad spread across countries and sectors. With such a broad index fund you can create a solid basis for the entire portfolio. Since such world ETFs combine developed and emerging markets in one fund, manual rebalancing is no longer necessary. As the business magazine Capital explains, these ETFs are also available in different sustainability levels.
Alternatively, if you want to have a little more control over the regional weighting, you can combine a developed markets ETF with an emerging markets ETF. This two-way combination offers global coverage with a balance between established markets and growth potential.
Bonds and thematic ETFs as a targeted supplement
Bond ETFs can also be useful to stabilize the portfolio, especially with a shorter investment horizon. Bonds typically offer more stable, albeit lower, returns than stock ETFs and can cushion fluctuations in the overall portfolio. Depending on your individual goals, the portfolio can also be supplemented with sector or topic ETFs, for example from the areas of renewable energy or artificial intelligence. However, investments should only be made in topics that the investor understands.
As the ETF specialist portal extraETF explains, attention should be paid to so-called cluster risks when expanding the portfolio. These arise when the same stocks are represented multiple times across different ETFs. A typical example: According to extraETF, anyone who combines an MSCI World ETF with an S&P 500 and an MSCI ACWI ETF will hold the large US technology stocks with a significantly increased weighting without achieving any real additional diversification.
A solid base with a single world ETF
According to Capital, one to three well-selected, broadly diversified ETFs are sufficient for most investors: a broadly diversified world ETF as the core, supplemented by a bond ETF to reduce risk and optionally a thematic ETF to focus on. An expansion to a maximum of five ETFs only makes sense in special cases. ExtraETF also recommends that beginners not include more than five ETFs in their portfolio in order to keep an overview.
Ultimately, what matters is not the number of ETFs, but whether each individual fund makes a real contribution to diversification. If you check which regions, sectors and individual stocks are already covered before purchasing an additional ETF, you can avoid overlaps and keep the portfolio lean and efficient. The composition is not about quantity, but rather about ensuring that each additional ETF represents a useful addition.
Dominik Maier, editorial team at finanzen.net
