ETFs are incredibly useful tools that provide access to multiple assets, regions, and industries. Investors can get exposure to thousands of securities with a single ETF purchase and easily diversify their portfolios. However, this convenience can be a double-edged sword…
Let’s explore ETFs and their features by using our free ETF Portfolio Tracker tool that will display insightful results to help everyone maintain a valuable portfolio.
ETF Portfolios: The Double-Edged Sword
Copiously adding multiple ETFs to a portfolio can actually have detrimental effects on performance. Investors might experience asset overlap, accumulation of expenses, and over-diversification.
Asset Overlap: This happens when two or more ETFs are bought, and each contains similar holdings. For example, if you buy IVV, which tracks the S&P 500 Index, and buy NDQ, which tracks the NASDAQ-100 Index, there will be an overlap with duplicate stocks.
|IVV Holdings||Weight (%)||NDQ Holdings||Weight (%)|
|Alphabet (Class A)||2.26||Tesla||4.2|
|Alphabet (Class C)||2.13||NVIDIA||3.9|
|JPMorgan Chase & Co||1.25||Adobe||2.1|
These two ETFs have especially similar holdings in their top 10. Therefore, investors adding IVV and NDQ to their portfolios would create an overlap in assets. This can create potential risks and counteract the benefits of diversification.
ETF Portfolio Tracker Tool
This tracker summarises the performance of your ETF investments through real-time data extraction showing costs, return and MER. It has a function to compare targets with actual weights and translates expense ratios into monetary values based on portfolio size and allocation.
The tracker creates insightful charts to expose where in the world the holdings within the ETFs are located, in which sectors, and even a breakdown of how your investment is being allocated per holding.
To analyze the allocations, you need to download the ETF holdings list with weights from ETF company websites. Check out this video explaining step by step how to do it:
ETFs are exceptional at helping investors optimize their portfolios. It is of essence to understand the exposure they provide while staying vigilant of the fees and holding allocations. This tool helps solve the intricacies of managing ETFs and produces granular analysis with versatile visualizations. We hope this equips you with the right tools and knowledge for your investing journey.
ETF Portfolio Tracker Features
ETFs represent a basket of multiple investments and serve as a tool for diversification. To avoid putting all the eggs in the same basket, or putting all your money in a single stock, ETFs act as an instrument that distributes that money across multiple investments ultimately reducing risk. For more information on getting started in ETFs check out our getting started guide.
What is Overdiversification?
The diversification provided by ETFs can be extremely effective. By adding one more ETF to your portfolio you are getting exposure to potentially hundreds if not thousands of additional investments. This creates the potential to get less exposure to high-growth assets and lower dividends.
The opportunity cost factor comes into play and investors must balance their money allocation between ETFs and alternative assets within their portfolio to ensure an optimal portfolio.
To help with this overwhelming exposure and management of investments, Planet Finance has created an ETF Portfolio Tracker to help investors analyze and visualize where their money is being allocated within ETF purchases.
Investment holdings vary depending on the theme of the ETF. There are ETFs that simply track an index like the ASX 200, and there are others that track specific industries or assets. The possibilities are endless, and investors can get creative on which investing method to apply.
Active, Thematic, and Passive ETFs
An active ETF is regularly managed by ETF companies that choose specific assets to track. With these types of funds being actively managed they rely on increased input and turnover, as such we generally see higher management fees.
Thematic ETFs are ETFs that select underlying holdings based on their exposure to particular investment themes or ideas. For example, ACDC tracks Battery Tech and Lithium stocks.
On the other hand, Passive ETFs simply mimic the holdings of an index or market. For example, IVV tracks the S&P 500 index. It aims to perform exactly like the index (after accounting for fees).
ETF Portfolio: Management Fees
ETFs charge management fees which are also known as Management Expense Ratio, or MER. The cost of these fees must be paid by shareholders and fortunately, they are automatically priced in the ETFs trading price. Fees depend on the theme of the ETF, the ETF company, and whether it is actively or passively managed.
|MER (Sep-2021)||0.69% p.a.||0.03% p.a.|
Despite many ETF options becoming increasingly cheap, it is important to consider the MER charged by ETFs. Investors who choose to invest directly in assets like a stock will save money on fees (excluding brokerage fees).
With actively managed thematic ETFs being usually pricier than passive ETFs, creating a portfolio consisting solely of thematic ETFs will affect the intrinsic performance of the portfolio due to the higher fees in actively managed ETFs.
ETF Portfolio Analysis
Taking the time to analyze your portfolio is something we feel strongly about. It is important to take the time to benchmark your Investments against your goals and risk tolerance.
Over time as you accumulate further ETFs, or as the proportions naturally become unbalanced the characteristics of your ETF portfolio can change drastically. This can lead to holdings that don't meet your risk-reward appetite and a portfolio that doesn't aline with your investing goals.
The ETF portfolio tracker simplifies and automates this process by breaking down individual holdings to analyze overlap and portfolio characteristics which are benchmarked against your investing objectives.