How many ETFs do you really need?

With more than 460 exchange-traded funds (ETFs) now available on the ASX, investors have more choice than ever.

You can invest in Australian shares, international markets, bonds, commodities and almost every sector or investment theme imaginable.

But how many ETFs do you actually need?

There's no magic number. And owning more ETFs doesn't necessarily mean you have a better portfolio. What matters more is what you own through those ETFs and how they work together to help you achieve your investment goals.

More ETFs doesn't always mean more diversification

One of the major benefits of ETFs is that a single fund can give you exposure to hundreds or even thousands of investments. This can make it easier to diversify your portfolio by spreading your money across different companies, industries and markets.

A broad Australian share ETF, for example, might hold shares in hundreds of companies across different industries. A broad international share ETF can provide exposure to hundreds or even thousands of companies across multiple countries and sectors.

That means you don't necessarily need a long list of ETFs to achieve diversification.

But not every ETF has the same level of diversification. A sector ETF might invest only in companies from one part of the market, while a thematic ETF could focus on a relatively small group of companies linked to a particular trend such as artificial intelligence, cybersecurity or clean energy.

So, simply counting the number of ETFs in your portfolio doesn't tell you much about how diversified it really is.

Watch out for ETF overlap

It's also possible to own several ETFs without realising how much they overlap.

Say you own a broad international shares ETF, then add a US sharemarket ETF and a technology ETF. While they may sound like three different investments, they could all hold some of the same large US technology companies.

The same can happen closer to home. Two Australian share ETFs tracking slightly different broad-market indices may still hold many of the same major banks and miners.

Overlap isn't necessarily a problem. You might deliberately want more exposure to a particular company, sector or market. The important thing is knowing that you're doing it.

Before adding another ETF, look beyond its name. Check what it holds, the index it tracks and its exposure to different countries and sectors. Then compare that with what you already own.

Start with what you want your portfolio to own

Rather than deciding you need five or 10 ETFs, start by thinking about what you want your overall portfolio to look like. 

For example, an investor might want exposure to Australian and international shares, while another may also want bonds or other defensive assets. The right mix will depend on factors such as your investment timeframe, goals and tolerance for risk.

The ETFs are simply the building blocks used to achieve that mix.

You also don't necessarily have to build and manage that mix yourself. You can use a professionally managed ETF portfolio as the core of your investments. The investment team chooses the ETFs, spreads your money across different markets and asset classes and takes care of keeping it on track.

Whichever approach you take, thinking about the overall portfolio first can help you avoid collecting ETFs without considering how they work together.

When does another ETF make sense?

A new ETF should ideally have a job.

Does it give you exposure you don't already have? Does it help create the mix you want? Does it fill a genuine gap? 

If you already have a broadly diversified portfolio, you might want to add an ETF that gives you extra exposure to a particular market, sector or investment theme you're interested in.

There's nothing wrong with owning a lot of ETFs, but each one adds something else to keep track of. Over time, it can also become harder to see exactly what you own, particularly if you keep adding new investment ideas without checking how they fit with the rest of your portfolio.

Before adding another ETF, think about what it will add and how it fits with what you already own.

So, how many ETFs do you really need?

There's no perfect number of ETFs. For some investors, two or three might be enough. Others may need more. 

Instead of counting how many ETFs you own, look at what you own through them, where they overlap and whether each one has a clear role in your portfolio.

Even a relatively small, simple portfolio of broad-market ETFs can provide diversification across a wide range of investments. The aim isn't to own as many ETFs as possible. It's to own the right mix for what you're trying to achieve.

Take the next step with InvestSMART 

InvestSMART's professionally managed ETF portfolios are designed to help you build a diversified core suited to your investment timeframe and risk profile. 

For investors who also want exposure to particular sectors, themes or ideas, InvestSMART Custom lets you combine that professionally managed core with up to five ETFs selected from our approved range. 

Explore InvestSMART portfolios