ASX ETFs are supposed to make investing simple. But stack too many of them together and you could end up paying multiple managers to buy many of the exact same companies.
That’s the cheeky catch with ETF investing: more tickers don’t necessarily mean more diversification.
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Are your ETFs secretly doing the same thing?
It’s surprisingly easy to build an ASX ETF portfolio that looks diversified on paper but is anything but.
Investors might own Betashares Australia 200 ETF (ASX: A200), for example, alongside another Australian broad-market ETF like iShares Core S&P/ASX 200 ETF (ASX: IOZ) without realising just how much their holdings overlap.
The same problem is arguably even more obvious in US-focused ETFs. An investor might own iShares S&P 500 ETF (ASX: IVV) alongside a Nasdaq-focused ETF such as Betashares Nasdaq 100 ETF (ASX: NDQ).
At first glance, these look like different investments. But there’s plenty of crossover, particularly among the US technology giants that dominate both indices. That means investors could be doubling down on the same companies without necessarily realising it.
When doubling up can make sense
There are, however, legitimate reasons to hold overlapping ASX ETFs.
Capital gains tax can be a big one. An investor sitting on a substantial unrealised gain may not want to sell an older ETF simply to switch into a cheaper or more suitable alternative.
Instead, they could leave the existing holding untouched and direct future contributions towards their preferred ETF. That’s a perfectly reasonable strategy, depending on an investor’s circumstances.
The problem arises when investors keep buying overlapping ETFs simply because each one sounds like a useful addition.
Keep the ETF core simple
One way to think about ETFs is to treat them as core portfolio holdings.
That doesn’t mean investors can only own a handful of funds. But the core should ideally be straightforward enough that you know exactly what you’re buying.
For example, an investor might have one ASX ETF providing exposure to Australian shares, another covering the S&P 500 and another providing broader international exposure.
Satellite investments can then be added around those core holdings, potentially covering areas such as bonds, fixed interest or specialised sectors.
The important thing is knowing what each ETF actually adds.
The diversification illusion
The danger of ETF overlap isn’t just paying extra fees. It can also create a false sense of diversification.
You might own five or six ASX ETFs and feel wonderfully diversified, only to discover that many of them hold the same mega-cap companies.
That concentration can become painfully obvious when markets turn bearish and several supposedly different ETFs fall together.
For investors, the lesson is simple: don’t count ETFs. Count the underlying exposures. A smaller portfolio of complementary ETFs can provide better diversification than a sprawling collection of funds that all own the same stocks.
After all, the goal isn’t to collect ETFs. It’s to build a portfolio that actually does what you think it does.