Is one ETF enough?

One factor is how much control you want to have over your portfolio.

Ashley Redmond 29 July, 2014 | 1:00PM Adam Zoll

 

 

Ashley Redmond: I'm Ashley Redmond for Morningstar.ca and I'm here with Adam Zoll a member of our personal finance team. Adam, thanks so much for joining me.

Adam Zoll: My pleasure Ashley.

Redmond: So, Adam we get this question frequently on Morningstar.ca. In fact, I got it last week via Twitter. People want to know, is one ETF is enough? For some investors that want to keep their portfolio simple or uncluttered, but still want global exposure, they could invest in something like iShares MSCI World. The ticker is XWD. So Adam, is one ETF enough?

Zoll: I would say one ETF is enough as long as it's sufficiently diversified. The one you mentioned covers stocks all over the world. I’d say it’s pretty well allocated to reflect the total world market caps or in essence it's a picture of what the world global stock market looks like. ETFs like this have thousands of holdings. They are very well diversified. So, for a certain type of set it and forget it investor, yes I do think one ETF can be enough.

Redmond: So what are the advantages of going with one ETF opposed to a combination of ETFs?

Zoll: I would say the advantage of going with a single ETF is mostly convenience. You only have one holding to check and all your assets are going into that one holding. You don’t really have the rebalancing issues that you may have with multiple holdings. So, it’s largely a convenience advantage and in some cases also a cost advantage.

Redmond: And what are the disadvantages?

Zoll: The disadvantage is that the allocation decision is made for you. Whatever the allocation that is being used by the ETF—well that’s your allocation. If you are more of a hands-on investor, somebody who wants to set your own allocation, then you are going to have to use multiple ETFs. You do have the option of layering another ETF on top of a total market ETF, but that gets a little complicated. You may be better off looking for individual ETFs and slicing the market however you want; if you want to add sector ETFs to core large-cap ETFs you could do that too. So, it's basically a matter of control. How much time and effort do you want to put into managing your portfolio?

Redmond: But, do you get enough diversification benefits with one ETF?

Zoll: I think you can get enough diversification as long as it's a well-diversified ETF. Like I said [earlier] the total world market ETF is going to own stocks all over the world. You're not running the risk of a sector tanking your performance or a small group of stocks or even maybe one region. So, I do think that it can provide the diversification qualities that you are looking for.

Redmond: Okay. So for someone that comes up to you and says, hey, Adam is one ETF enough? What's the main takeaway for them?

Zoll: The main takeaway is that it really depends on how much control you want to have over your portfolio. I would also pay attention to price and see if there is a difference between managing multiple ETFs versus a single ETF. But the big takeaway is, do you want to be locked into the allocation that the ETF uses? Or do you want to have your own control over that?

Redmond: Great, thanks so much Adam.

Zoll: My pleasure.

Redmond: For more insight on ETFs go to the ETF section of Morningstar.ca.

About Author

Ashley Redmond

Ashley Redmond  Ashley Redmond is a Vancouver-based freelance writer.