Diversifying Your Portfolio: One Vs. Multiple Etfs

Exchange-Traded Funds (ETFs) are a popular investment vehicle, offering instant portfolio diversification. But what's better – investing in multiple ETFs or sticking to just one? This is a complex question and the answer depends on various factors, including an investor's risk tolerance, investment goals, and time horizon.

Some investors opt for a single top-tier ETF like the Vanguard Growth Index Fund ETF (VUG), which provides exposure to a diverse range of stocks, mainly in the tech industry. This simplifies portfolio management and offers consistent returns without the need to constantly monitor performance.

On the other hand, investing in multiple ETFs can offer diversification based on different objectives. For instance, an investor could allocate capital to both a growth-oriented ETF and an income ETF. Additionally, holding multiple ETFs can reduce the risk of putting all your eggs in one basket, which may be beneficial during market downturns.

Ultimately, the decision to invest in one or multiple ETFs depends on an investor's specific circumstances and preferences. It's crucial to understand your financial goals, risk tolerance, and time horizon before making any investment decisions.

Simplicity vs diversification benefits

The age-old adage of "don't put all your eggs in one basket" rings true for many investors when considering whether to invest in a single ETF or multiple ETFs. Diversification is a key goal for any investor, and a common belief is that multiple ETFs help achieve this. However, the decision between simplicity and diversification has its own benefits and trade-offs.

Simplicity Benefits:

• Reduced Complexity: Investing in a single ETF simplifies the investment process, reducing the time and effort spent on buying, monitoring, and selling. It also eliminates the need for frequent portfolio checks, as an ETF automatically rebalances the share of each stock according to their capitalization.
• Lower Transaction Costs: A single ETF means lower transaction costs with your broker compared to multiple ETFs.
• Simplicity Works Well in the Long Run: Investing in a single broad-market ETF, such as VT, VTI, or VXUS, can provide average market returns without the need for extensive research. This "set-it-and-forget-it" approach has proven effective for many long-term investors.
• Instant Diversification: A single top-tier ETF can offer instant portfolio diversification, with some ETFs holding over 100 holdings across various sectors and industries. This provides exposure to a diverse range of stocks, especially in the tech industry, which has historically outperformed the market.

Diversification Benefits:

• Risk Mitigation: Multiple ETFs can provide a safety net during bear markets or economic downturns. Diversifying across different sectors, industries, and geographic regions can reduce the impact of catastrophic events, such as the COVID pandemic, on your portfolio.
• Customized Portfolio: Multiple ETFs allow for a more customized portfolio, tailored to specific sectors, industries, or investment strategies. This enables investors to target specific areas they believe will outperform the market.
• Enhanced Returns: Diversification across multiple ETFs can potentially enhance overall returns. By investing in a combination of growth-oriented and income-focused ETFs, investors can benefit from steady dividend income and higher returns from growth stocks.
• Tax Efficiency: Using individual ETFs across multiple accounts can lead to a more tax-efficient portfolio. For example, investors might favour equities in a TFSA and bonds in an RRIF, which is not possible with a single balanced fund.

In conclusion, the decision between simplicity and diversification depends on an investor's risk tolerance, time horizon, and investment goals. While a single ETF offers simplicity and instant diversification, multiple ETFs provide enhanced diversification, customized portfolios, and the potential for higher returns. Ultimately, investors should assess their own circumstances and implement a strategy that aligns with their financial objectives.

Historical returns

When considering investing in one or multiple ETFs, it is important to assess the historical returns of the funds in question. This can help investors gauge the consistency of returns and make a more informed decision about whether to invest. For example, the Vanguard Growth Index Fund ETF (VUG) has generated steady returns over the long run, with an annualised return of 16.27% over the past 15 years and 17.37% over the last five years. This strong performance is a positive indicator for investors considering this particular ETF.

However, it is worth noting that past performance does not guarantee future results, and other factors should also be considered when making investment decisions. For instance, investors should assess their risk tolerance, investment goals, and the level of diversification offered by the ETF or ETFs in question.

Additionally, it is important to remember that investing in multiple ETFs can provide greater diversification, which may help to reduce risk. By allocating capital across various ETFs with different objectives, such as growth-oriented and income-focused funds, investors can further diversify their portfolios.

Ultimately, the decision to invest in one or multiple ETFs depends on various factors, including an investor's risk tolerance, financial goals, and investment strategy. It is always recommended to conduct thorough research and consult with a financial advisor before making any investment decisions.

Growth vs income focus

When considering investing in Exchange-Traded Funds (ETFs), one of the key questions is whether to put your money into one or several different ETFs. While there is no one-size-fits-all answer, there are several factors to consider when making this decision, including your risk tolerance, investment goals, and time horizon. Here is a detailed discussion focusing on the "Growth vs Income Focus" aspect of this decision:

Growth Focus:

If you are a young investor with a long investment horizon and do not need immediate dividend income, a growth-oriented ETF might be a suitable option. Growth ETFs aim to maximise capital appreciation over time, investing in companies with strong growth potential, particularly in the tech sector.

For example, the Vanguard Growth Index Fund ETF (VUG), mentioned by Marc Guberti in his article, provides exposure to 199 stocks, with a large focus on the technology industry. This ETF has generated steady and impressive returns over the long term, with a 16.27% annualised return over the past 15 years and a 17.37% annualised return over the last five years.

By investing in a growth ETF like VUG, you benefit from instant diversification across a range of growth stocks, without the need to pick individual stocks yourself. This simplifies your investment strategy and allows you to focus on your career and increasing your income, which can contribute more significantly to your long-term financial goals than chasing high returns through risky investments.

Income Focus:

On the other hand, if you are at a stage in your life where you seek a steady income stream from your investments, an income-focused ETF might be more appropriate. Income ETFs typically invest in more mature companies that pay regular dividends. While the overall returns may be lower than growth ETFs, the income generated can provide a stable source of cash flow.

For example, the iShares S&P 500 Utilities Sector ETF (IUUS) mentioned earlier, focuses on utilities stocks, which are generally less risky than growth stocks. This ETF has generated a 7.45% annualised return over the past five years, lower than the returns of the VUG ETF.

Income-focused investors might also consider individual stocks or a combination of ETFs and individual stocks to customise their portfolio according to their specific income needs.

Key Considerations:

When deciding between growth and income focus, it is essential to assess your financial goals, risk tolerance, and time horizon. Here are some key points to consider:

• Time Horizon: Younger investors with longer time horizons are generally better suited to growth ETFs, as they can ride out short-term market volatility and benefit from the potentially higher returns over time.
• Risk Tolerance: Growth ETFs tend to be more volatile and carry higher levels of risk, so ensure your risk tolerance is aligned with this type of investment.
• Income Needs: If you require a steady income stream, an income ETF or a combination of income and growth ETFs might be more suitable.
• Diversification: Both growth and income ETFs offer diversification, but the specific sectors and industries they focus on differ. Ensure the ETF's diversification aligns with your investment strategy and goals.
• Tax Implications: Dividend income is taxed, so consider the potential tax implications for your specific situation when deciding between growth and income focus.

Individual stocks vs ETFs

Individual stocks represent a fractional ownership interest in a business and typically trade on an exchange. When you own a stock, you're investing in the success of that one company. In the short term, stocks may rise and fall for various reasons, but in the long term, a stock's performance closely follows the company's growth.

ETFs, or exchange-traded funds, are collections of assets, often a mix of stocks, bonds, or other assets. A single ETF may own dozens or even hundreds of stocks, allowing investors to own an indirect stake in all the underlying assets. ETFs often focus on specific areas, such as large companies, dividend-paying companies, or those in a specific industry.

Key Differences:

• Risk and Diversification: ETFs are more diversified than individual stocks, as they hold a variety of assets, reducing risk and volatility. Individual stocks are riskier, as your capital is tied to the performance of a single company.
• Returns: Individual stocks can offer higher returns than ETFs, especially if the company is growing quickly. However, ETFs may also outperform individual stocks, depending on the specific stocks and the overall market performance.
• Effort and Control: Investing in individual stocks requires more effort to research and analyse company performance. With ETFs, you have less control over the specific assets you invest in, as they are pre-selected.
• Taxes: Both individual stocks and ETFs are taxed at short-term or long-term capital gains rates. However, with individual stocks, you won't be taxed on capital gains until you sell, while ETFs may be taxed on dividends or realised gains.
• Suitability: ETFs are generally more suitable for beginners or those seeking a simpler, more diversified investment strategy. Individual stocks may be better for advanced investors who enjoy analysing companies and have the time to devote to investing.

Both individual stocks and ETFs have their advantages and can be used in combination to further diversify a portfolio. Individual stocks offer higher potential returns and more control, but they also carry more risk. ETFs provide instant diversification, reduced volatility, and are easier to manage, making them a good choice for those starting or seeking a more passive investment approach.

Similar ETF portfolios

When it comes to investing in Exchange-Traded Funds (ETFs), there are differing opinions on whether it is better to invest in one or multiple. Some investors advocate for the simplicity and ease of managing a single ETF, while others suggest that diversifying across multiple ETFs can help reduce risk and improve returns. Here are four to six paragraphs on similar ETF portfolios:

Investing in similar ETFs can provide exposure to different sectors or regions while maintaining a consistent investment strategy. For example, a portfolio could include the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total World Stock ETF (VT). AGG offers a diverse range of domestic investment-grade bonds, while VT provides access to a broad range of global equities. This combination gives investors a balanced exposure to stocks and bonds, with a slight tilt towards the U.S. market.

Another example of a similar ETF portfolio could include the iShares Core Moderate Allocation ETF (AOM) and the Vanguard FTSE All-World UCITS ETF (USD). AOM is a "fund of funds" that invests in multiple other iShares ETFs, providing a conservative mix of 40% global equities and 60% global fixed income. On the other hand, the Vanguard FTSE All-World UCITS ETF offers exposure to a wide range of international stocks from developed and emerging markets. Together, these two ETFs provide a well-diversified portfolio with a global reach.

Additionally, investors seeking a more aggressive approach could consider pairing the iShares MSCI Global Energy Producers ETF (FILL) with a broader commodity ETF like the Direxion Auspice Broad Commodity Strategy ETF (COM). FILL provides access to global energy stocks, including major oil companies and hard-to-access stocks from the Middle East and Asia. Meanwhile, COM offers exposure to a basket of commodity futures, including agriculture, energy, and metals. This combination allows investors to benefit from the inflation-hedging properties of commodities while also gaining targeted exposure to the energy sector.

For those interested in the tech sector, a combination of the Vanguard Growth Index Fund ETF (VUG) and the iShares Global Clean Energy UCITS ETF could be appealing. VUG has a strong focus on technology, with over half of its assets invested in the industry. Meanwhile, the iShares Global Clean Energy UCITS ETF provides targeted exposure to clean energy companies, allowing investors to benefit from the growth of this specific sector within the broader tech industry.

It's important to remember that while these portfolios share similarities, they also have unique characteristics. Investors should carefully consider their investment goals, risk tolerance, and time horizon before constructing their ETF portfolios. Additionally, it's crucial to regularly monitor and assess the performance of the ETFs to ensure they align with the investor's expectations and make adjustments as needed.

Frequently asked questions