Many investors rely on numerous ETFs to spread their risk – but this can result in overlaps that increase the cluster risk.
• More ETFs can lead to duplication instead of true risk diversification
• US-heavy indices often unconsciously increase the weighting of individual markets
• Portfolio with few ETFs remains clear and efficient
When setting up a portfolio, diversification is the central rule for reducing risk. But a larger number of ETFs does not automatically lead to better diversification. Investors often combine global ETFs with additional indices such as the S&P 500 or thematic funds for AI or cybersecurity in order to benefit from certain trends or, in particular, the strong development of the US market – while at the same time creating a feeling of broad diversification.
Possible overlaps
In practice, however, a large number of ETFs do not always bring real added value. Instead, overlaps can arise: For example, anyone who combines a global index like the MSCI ACWI with US-oriented indices increases the already high proportion of American stocks. This means that certain stocks are weighted multiple times without the spread actually increasing. The same applies to thematic ETFs: Many of the companies they contain are already heavily represented in global indices, so additional investments can reduce rather than increase diversification.
Complexity of the portfolio
As the number of ETFs increases, the complexity of the portfolio also increases. The overview suffers and the effort for adjustments also increases. If you want to maintain fixed weightings, you have to adjust positions regularly. This becomes more complex with more ETFs. There are also potential costs and tax effects from more frequent reallocation.
This is how it can work
For many investors, a rather slim ETF portfolio is sufficient. A single ETF that invests globally can already cover many companies from developed and emerging markets and requires little maintenance. With two ETFs, the weighting between developed markets and emerging markets can be specifically controlled. Three ETFs allow for additional focuses – such as a greater emphasis on Europe or the inclusion of certain factors such as small caps – but should serve a clear purpose.
If you still want to focus on trends, you can do this using a core-satellite strategy. A broad core of one to three ETFs forms the majority of the portfolio, while smaller additions are used for themes or individual stocks. This means the basic structure remains stable without having to forego additional opportunities.
The bottom line is: There is no right number of ETFs – this depends, among other things, on the investment strategy and risk tolerance. In addition, it is not the number of ETFs that determines diversification, but rather the values they contain. Too many funds can lead to duplication, increased effort and more complexity – with no real benefit for risk diversification.
Julia Walter, editorial team at finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
