How Many ETFs SHOULD You Really Have

Did you know that there are themed ETFs for pretty much anything now? The other day, I went down a rabbit hole and found some pretty specific ones. There's literally a pet care ETF which includes companies like Chewy, Fresh Pet, and Zoetis. So yeah, you can buy an ETF where a chunk of your portfolio is basically dog food, vet bills, and pet subscriptions. And there's also a K-pop and Korean entertainment ETF. This ETF holds companies like HYBE, SM Entertainment, and JYP Entertainment. So you can actually invest in the whole K-pop world. And I get why they exist. If an industry is growing fast, it makes sense that people want a simple way to invest in it. But once you start chasing the next exciting fund, it doesn't take long before your portfolio turns into a messy pile of say 20 plus ETFs. This is something that I've been seeing a lot with newer investors in my community and a mistake that I transparently made myself before hitting my 1 million dollar portfolio. So today, I want to walk you through why having too many ETFs can drag your portfolio down. And then I'll share a simple strategy that experienced investors stick to for the long run. So let's start with why so many of us end up with 20 plus ETFs. It usually comes from a good place. We're trying to do what responsible investors do. We're taking general investing advice and applying it to ETFs without realizing that ETFs play by slightly different rules. We've had it all drilled into our heads that we should follow the smart money, invest in what you know, and spread your money around. And yeah, to be fair, this advice makes a lot of sense if you've gotten a higher risk tolerance and maybe you're picking individual stocks. For example, if you read an article saying that a well-known investor thinks a specific stock will soar, it's a company that you actually understand, and it would add a new type of exposure to your portfolio, then yeah, taking a calculated risk might be reasonable. But with ETFs, you have to be a little bit more careful. Just because you're familiar with pet care and you've read tons of content saying that it's the next big thing, it doesn't automatically mean that PAWZ belongs in your portfolio. If you apply the same instincts to ETFs without any guardrails, it's really easy to end up with a portfolio that looks diversified, but isn't actually doing what you think it's doing. And that's why having 20 plus ETFs usually isn't the best way to go. Let's look at the main reasons why. First is false diversification. If you pick 20 individual companies and invest, say, $1,000 into each one, then you end up with 20 separate positions. If these companies are spread across different industries, they'll often react differently to changes in the world. So say if one company has a bad year, it doesn't automatically mean the rest of her portfolio gets dragged down with it. Your initial investment of $20,000 might still go up overall, even if a few companies have a rough year. On the other hand, if you buy 20 ETFs and invest that same $1,000 into each one, it can feel like you're being safer because each ETF already holds a basket of companies. Unfortunately, the baskets can overlap a lot more than you think. Let's say one of your ETFs is focused on clean energy. We'll call it WATT. Then you add another ETF that feels totally different, like a fund built around, say, I don't know, video games and esports. We'll call this one PLAY. They have different themes and they sit in different industries, so you assume that owning both is helping you diversify. But when you take a look under the hood, you realize that more than 60% of the holdings are the same companies. Maybe not the exact same weightings, but many of the same names show up in both. For example, maybe you notice that both WATT and PLAY invest in Microsoft because it's a major player in cloud computing, and they both invest in NVIDIA because it powers everything from AI infrastructure to gaming hardware. So instead of apples and oranges, you just bought a lot more apples than you bargained for. And once you notice it in two ETFs, you start seeing it across the rest of your portfolio. Another ETF overlaps by, say, 40%. Another overlaps by, say, 80%. By the time you've gotten through your entire portfolio, you realize that 20 ETFs are far more similar than you thought. They're basically giving you the same core set of companies, but repeated in different wrappers. If those core companies take a hit, a big chunk of your portfolio can drop with them. ETFs do spread risk inside the fund, but stacking a bunch of similar ETFs doesn't increase it nearly as much as it feels like. A common mistake my team and I have noticed with the beginner investors that we work with is that many of them own multiple ETFs that all track the S&P 500. We've worked with so many people who have SPY, SPYM, VOO, IVV, and even FXAIX. They all see these stickers and assume that they have a diverse portfolio, but each of those ETFs is doing the same exact thing. Now, I'm not saying that having overlap is necessarily bad because it really depends on what your goals are. For example, I personally invest in SPYM and QQQM, which have a lot of companies like Microsoft and Amazon in both funds. I also have individual shares of Microsoft and Amazon. The reason I do this is because I like to have a higher concentration in U.S. technology companies because I'm still young at 38 years old, and really, I don't mind the volatility for the next 10 to 20 years. I also invest in SPY and SPYM, which both tracks the S&P 500. I know this sounds like I just went against what I said earlier, but I have different purposes for both ETFs. I generally have SPY to sell cover calls to collect income, and I have SPYM for my long-term hold. So in the end, you just wanna see what your goals are and what fits your risk tolerance. There is this awesome website that my team and I use with our students all the time called Fund Overlap, and this is where you can plug in your ETFs and see exactly how much they overlap. So if you have more than, say, five ETFs right now, you can run your portfolio through it to see how diversified you really are. I added the link to my money cheat sheet under the ETF comparison tab. And again, this is a free resource that I made for you and all of my other followers who want a simple way to start investing in ETFs as a complete beginner. I'll leave a link down in the description. Now, you might think that there's no harm in owning several similar ETFs. Maybe it doesn't actually diversify you, but it also doesn't really hurt anything, right? Well, not quite. The second reason 20 plus ETFs can be a problem is that they tend to raise your costs and complicate your portfolio without really improving your results. Let's say that you do some reading and decide that, say, SPYM is the Michael Jordan of ETFs and that you don't really need anything else in your portfolio. So you invest your full $20,000 into it. In this case, the main ongoing fee that you're paying is the fund's expense ratio, which is currently around 0.02% per year. On a $20,000 position, you're roughly paying, say, $4 a year in expense ratio fees. Now, compare that to your friend who loves to remind you that she's in 20 different ETFs, not just one. She spreads her $20,000 evenly across them, so she's putting $1,000 into each fund. Some of those ETFs are cheap and some are surprisingly expensive. And the more niche and trendy the ETFs get, the more likely it is that the fees creep higher. So instead of paying one simple expense ratio, she's dealing with a long list of expense ratios. Maybe her first ETF charges 0.01%, which sounds amazing compared to your Michael Jordan. But then the next one charges, I don't know, 0.5%. The next one charges, say, 2.3%. And another one charges 0.64%. And once you average those expense ratios across her whole portfolio, it might come out to around 2%. So if we assume the same 10% growth for the year, she'd be paying around $440 in fees by the end of that same year. And that's about $436 more than you pay, even though you both invested the same $20,000. Once you start collecting ETFs, it becomes easy to accidentally stack high fee funds into your portfolio without realizing how quickly those fees add up. Now, if you wanna see this in seconds, I actually just added a quick expense ratio comparison on my money cheat sheet if you wanna check it out later. Okay, now you might be thinking, okay, fine, maybe it's more expensive, but if the returns are higher, then it's worth it, right? Well, not always. The third reason why having lots of ETFs can be a bad idea is that your upside is often more limited than you think because the extra ETFs don't automatically improve your results. In a lot of cases, they water them down. A while back, a friend of mine wasn't seeing the returns that she hoped for, so she asked me to take a look at her portfolio. The first thing that I noticed was that she had 17 different ETFs. Seven of them all tracked the S&P 500 in slightly different wrappers, and the other 10 were smaller, more volatile niche ETFs similar to the K-pop and pet care ETFs that I talked about before. Now, I could see what she was trying to do. She was using the S&P 500 ETFs for stability and then sprinkling in some higher risk ETFs for extra upside, but in practice, it didn't really play out this way. The S&P 500 side of her portfolio ended up being average, which is fine, but a bunch of the niche ETFs lost money and those losses ate up the average wins. At the time I looked, eight of her 10 niche ETFs were down, and the portfolio that was supposed to feel diversified was basically dragged around by a handful of bad bets. So instead of spreading her risk across 17 ETFs, she ended up with a portfolio that was up around 2% when she could have been up more by keeping things simpler. Just because you own more ETFs doesn't mean that your chances of strong returns go up. And if you're chasing niche, trendy, one-time wonder ETFs, there's a higher chance that you're buying something that doesn't hold up over time. So if 20 plus ETFs are too many, then how many should you have? So personally, I like keeping it simple and sticking to three to five ETFs. There are plenty of areas in life where it pays to obsess over the details. If you want to master a skill, build a business, or get really good at something, you often have to zoom in all the way. But investing tends to reward the opposite. Over and over again, I learned that investing works best when you keep it simple, keep it boring, and really just leave it alone. Trying to balance and chase a long list of ETFs doesn't usually give you better returns. It just complicates your life, eats up your time, and to me, lost time is basically lost money. That's why I really like the three fund strategy. It's based on Jack Vogel's indexing philosophy, where you build a portfolio just using three prod ETFs. One for the total US market, one for international stocks, and one for bonds. I love this simplicity, and it lines up with how I invest too. Even years of being absorbed in the investment world, I still limit my ETF lineup to just five. For my portfolio, I hold SPYM and QQQM as long-term positions, and it's basically my S&P 500 exposure and my growth and technology exposure. Then I use SPY and QQQ to sell cover calls for additional income, and I hold SEHD for dividends. And really, that's it. I've had this exact portfolio along with some satellite stocks for the past several years, and I don't really have any intention of changing it anytime soon. In the end, invest in whatever you feel most comfortable with. What feels right for me might not be the best fit for you, but just be cautious if you have more than five ETFs or if you find yourself constantly swapping them out. Because for most people, the best investing decision is the one that you can stick with for years. And usually, that means keeping things simple. Again, if you want a full comparison of the main ETFs, I put it all in my money chichi. It's free. It includes side-by-side fun comparisons for S&P 500 ETFs, growth and tech ETFs, and dividend ETFs. I'll drop it down below, and I'll see you in the next video here.