How Many ETFs Should I Own?

The Short Answer

Knowing how many ETFs to own, in my opinion, from experience and due diligence, really depends on risk tolerance, diversification, and the amount of research an investor wants to do. Picking one ETF that covers all areas and aligns with my goals is my method for one of my individual brokerage accounts. In other cases, an investor might want more exposure to other sectors or areas of the market, like foreign stocks, commodity ETFs, or a specific industry.

In the beginning, choosing a strategy and doing a lot of research could help make the rest of the process more efficient. My approach is to buy into one ETF every one or two weeks, depending on how much cash I have on hand. Along with doing checkups on the market and economic conditions, there isn’t much work involved. I do this checkup as an exercise to stay updated on what’s performing well and what’s not.

There are numerous strategies out there for investing in an individual brokerage account and, even more specifically, ETF investing. Some investors like to day trade, swing trade, buy individual stocks, and/or plenty of other strategies. I recently opened a brokerage account just buying ONE ETF, which is very different from another method I was doing, called dividend growth investing. 

Let’s go through some factors I look at for buying ETFs; I’m not an expert, but I like to learn about what holdings my money is being invested in and what’s available on the market. 

What is an ETF (Exchange-Traded Fund)?

You can read more about what an ETF is specifically here, and according to ETF.com, an ETF is a “pooled investment vehicle”  of securities or other financial instruments. ETFs also trade on the stock market and can be bought like stocks.

Research

Due diligence can be essential in picking which ETF and how many ETFs to hold in a portfolio. Most ETFs have websites to get information like top 10 holdings and even a breakdown of every holding in the fund. Depending on which sector or industry someone wants to invest in, the list of holdings can provide more context behind what companies the fund is focusing on.

Another factor I take into account is looking at the lifetime performance of the exchange-traded fund since its inception. I then look at the total return year by year. The past performance may not tell me the present or the future outlook, but it can help me see how the fund performed during volatile economic conditions. 

Some companies’ websites indicate which ETFs are riskier or less risky; then, I look at which sectors the fund focuses on. I also look at the sector breakdown to see how the company allocates the holdings in the exchange-traded fund between sectors/industries (more in the diversification section about this).

One great thing I learned was that some ETFs offer distributions (dividends) to shareholders. As I mentioned before, I am a fan of dividend investing; some ETFs offer dividends that they payout monthly or quarterly. In this case, I reinvest the dividends into the fund to compound the initial investment with time and consistency.

Expense Ratios

I look at ETFs with lower expense ratios because it may be cheaper to hold the fund in the long term. I’ve seen ratios as low as 0.03%. Higher expense ratios could mean a more expensive ETF to hold. Some ETFs with more growth potential may have higher expense ratios. I’ve seen some as high as 0.40%-0.80%.

When I decided to buy an S&P 500 ETF, I compared various funds’ expense ratios and overall performance to see which aligned the most with my preferences.

I found this article that explains expense ratios and gives a more in-depth explanation as to why an investor has to pay an expense for holding an ETF. In short, it has to do with managing the fund and operations.

Diversification

Buying multiple stocks in different sectors or industries can be one way to start diversifying a portfolio. Well, I’ve seen some ETFs have over 4,000 stocks and some that only hold slightly over 50. 

Depending on which sectors an investor wants to invest in or even foreign companies, it may be a good idea to look into multiple ETFs. For example, one for foreign stock exposure, one for a specific industry, and/or one for the S&P 500. 

Another factor to be considered is how much capital to allocate to specific stocks or ETFs. I started a portfolio recently, buying only one ETF that mirrors the S&P 500, and I am dollar cost averaging into it every week or bi-weekly. This means I don’t have to time the market or figure out when the best day to buy is.

Everyone can have their own strategy, risk tolerance, and method behind investing; I think a good point to focus on is what works for you—there are plenty of financial advisors to ask for advice about what works for them and their clients.

Conclusion

As I mentioned in the beginning, how many ETFs an investor should put in their portfolio is relative to multiple factors like risk level and diversification. One ETF may not offer complete exposure to other industries or other areas of the market that an investor would like to invest in.

A more straightforward approach could be just one ETF that offers diversification and exposure to growth sectors while minimizing risk. ETFs focus on different things like sectors, industries, an index, and/or other financial instruments; in my opinion, it all comes down to preference and risk tolerance.

I also thought I would mention a helpful tool I found to research and compare different exchange-traded funds on the market. I could find dividend yield %, numerous ratios, amount of holdings, expense ratios, the top 10 holdings, and much more information.

Research is a significant part of my investing process, and although I may not be able to predict the next best thing, I at least have an idea of where my money is going. If you are interested in reading more about ETFs, check out this article I found that has some beneficial information.

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