How Many ETFs Do You Need?

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.”

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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