There are nearly 1,000 exchange traded funds (ETFs) on the market today. Can you pick just one of them and get the exposure you need?
Naturally, many ETFs are similar in either strategy, underlying index or sector exposure. What most experts agree on is that owning far too many ETFs may give you far too much exposure to the markets. Less may be more, but how much more? [As The ETF Industry Grows, Some Stay Skeptical.]
The idea behind owning different ETFs is that you want a variety of different types of investment exposure, says Dan Caplinger at the Motley Fool. If your holdings have a low correlation, it will give your portfolio a better chance of rising over time.
But look out – sometimes assets are more correlated than you may believe.
Caplinger points out that the returns of many ETFs can be very highly correlated with the returns of the S&P 500. [Are ETFs Really Dangerous?]
It is important to know what each and every ETF you want to hold owns. Which companies do they hold? At what weighting? This will help you realize which funds are simply overlapping and help you determine how diversified you are.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.