The downside & upside of ETFs

Hi Friends!

Most of us love ETFs. However, do we really know the pros and cons of ETFs in specific details?

Firstly, what are ETFs? (Exchange Traded Funds)

• ETF is a basket of securities that seeks to track an underlying index. These indexes can include stocks, bonds and commodities.

Personally, I do like some ETFs but not all of them.

The PROS of ETFs are pretty straightforward.

1. Lower Cost as compared to underlying individualsecurities

2. Lower Expense Ratio

3. Diversified

4. Saves time

Having said that, owning dozens of ETFs in your portfolio is very likely to be counterproductive.

Assuming Mr ABC buys:

•World ETF

•FTSE 100 ETF

•S&P500 ETF

•Russell 2000 ETF

•Sectors ETF (XLK, XLE, XLY, etc.)

•STI ETF

•HSI ETF

•Growth/Emerging Markets ETF

•Commodities ETF

•Bonds ETF

In my humble opinion, when an individual holds too many different ETFs in his/her portfolio, it introduces inefficiencies.

When you take a closer look, you’ll notice that your ETFs are overlapping, which creates redundancy in the other ETFs that you’re holding.

Furthermore, over diversification dilutes the effect of well-performing holdings in your portfolio and hampers your returns.

Geographically, we have to bear in mind that indices of different countries focus their weightage on different sectors respectively.

For example, $FTSE100 ETF(ISF.UK)$ is oil heavy. Basically meaning that it places a heavier weightage on Oil Companies. While $Straits Times Index(STI.SI)$places a heavier weightage on Banks.

The legendary Jack Bogle’s “The Bogleheads 3 Fund Portfolio” might be a good benchmark to make sound and informed investment decisions.

While ETFs have its advantages, there is no need to buy dozens of ETFs to be profitable and diversified. Less is more.

Cheers!