How Many ETFs Do You Need?

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During various recent posts, I touched on the importance of selecting ETFs with large volume to get faster and better execution along with lower bid/ask spreads. Reader TrendMan has this to say on the subject:

These new ETFs are like a run away train totally out of control. Investing is already complicated enough and now there will be hundreds more choices out there.

When it is all said and done really all most of us need are the following 4 one beta long ETFs like QQQQ, SPY, IWM, and maybe at times EFA as well as a couple of one beta short ETFs like PSQ and SH. If only two ETFs were to be used I would go with VXF long and SH short for myself. All these would be used at the appropriate times during each trend timing market cycle.

I agree with this assessment. Over the years, I have seen far more over invested portfolios than underinvested ones. What I mean by that is many investors diversify way too much. For example, a $100k portfolio does not have to contain almost 30 ETFs of every imaginable sector. 4-5 well chosen ETFs will be more than sufficient to capture the major long-term trends in the market place.

Even in a $1 million portfolio, I will use no more than 10-12 ETFs/mutual funds. You might consider this putting all of your eggs in one basket (or not enough baskets).

However, when using the trend tracking methodology (with sell stops) my mantra has always been that “you can put all of your eggs in one basket, as long as you watch that basket.”

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Comments 5

  1. Hi Ulli,

    I agree that the ETF's you mention will get the general flow of the market. However, it appears one could do considerably better by picking ETF's which are more specific. For example, using your country ETF list as of 09/03/2009, EFA has a YTD of 15.27 percent. However, EWO has a YTD of 51.84 percent; EWY has a YTD of 53.56 percent; RSX has a YTD of 79.80 percent. It would seem that these would be better choices for one who watches what is going on. Take care. Joe Darrow

  2. I use RSP,QQQQ,IWM,EFA,EEM as my core which I tend to hold longer which means I give them a little more slack in my stop loss. I supplement this with a few non-core selections from county, sector, and commodities which I watch more closely. This keeps the number of funds I use to about 8-10. I do add a short ETF or two once in awhile.

  3. Ulli,

    Can you please explain how someone who appears to advocate Market tracking investing using stop losses can also advocates hedging "the simple hedge strategy"?

    The 2 strategies seem to be completely opposite approaches to investing.

    Can you please explain to me why you advocate both approaches, and the advantages of both?

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