How do your ETFs fit together?

As portfolios grow over time, it’s easy to add new investments without stepping back to consider how they fit together.

Over time, even a well-built portfolio can become more complicated than intended. New investment ideas, changing goals and different market environments all play a part. The key is making sure every holding still has a clear role in line with your original investment strategy.

There’s a straightforward way to review your portfolio. It starts with knowing what you own, and why. Pull up all your holdings and write a single sentence describing what each one does for your portfolio.

As you work through them, you might notice a few patterns:

Overlap: Two or more funds or companies in a similar niche can create duplication where you believe you have diversification, and with ETFs you’re paying fees twice for the same exposure.

Gaps: Having five growth-oriented funds and no income or defensive funds might be your investment strategy, but it’s worth recognising that a gap exists. If you realise your balance is out of whack, you can figure out what’s missing.

Outliers: Sometimes a one-off investment reflects a particular idea or opportunity at the time. It’s worth revisiting these holdings to check whether the original rationale still holds and how they fit with your broader investment strategy.

Once you understand what each investment is doing in your portfolio, it can be useful to group them into four broad roles. This isn’t the only way to think about a portfolio, but it provides a simple framework for understanding how your investments fit together.

This part of your portfolio aims to provide broad market exposure at low cost, compounding over time without requiring much attention. Global equities index funds and broad Australian equities funds typically fit here.

For this role, it’s worth looking beyond the number of ETFs you own to understand the exposure each one provides. For example, DHHF Diversified All Growth ETF, NDQ Nasdaq 100 ETF and QUS S&P 500 Equal Weight ETF could all sit within the growth part of a portfolio, but they provide different exposures. Looking at the markets, sectors and companies held across your growth investments can help you understand where they complement each other and where there may be overlap.

These investments aim to provide regular distributions from sources such as dividends or interest. They can play a role for investors seeking income from their portfolio. Equity income funds, such as the HYLD S&P Australian Shares High Yield ETF, and fixed income ETFs, such as the CRED Australian Investment Grade Corporate Bond ETF, can both sit here.

It’s worth considering income alongside your broader objectives. Investments designed to generate higher income can have different growth potential and risks, so consider how much of your portfolio you allocate to income and how that exposure complements your other holdings.

These investments can help balance the risks elsewhere in your portfolio by behaving differently from growth assets such as shares. Bonds, commodities and even infrastructure exposure like TOLL FTSE Global Infrastructure Shares Currency Hedged ETF can play this role, potentially helping to cushion the portfolio when sharemarkets fall.

The key is understanding what kind of diversification an investment actually provides. Different assets respond differently to changes in interest rates, inflation and economic growth, and they won’t provide protection in every market downturn.

Look at what the ETF holds, the risks it is exposed to and how it has behaved in different market environments to understand the role it could play alongside your other investments.

This is where you can express a more specific investment view alongside the broader parts of your portfolio.

A sector-focused ETF like HACK Global Cybersecurity ETF or a regional exposure like ASIA Asia Technology Tigers ETF might sit here, giving you the opportunity to tilt your portfolio towards an area where you see potential.

Satellite investments can add another dimension to a portfolio, but they work best when they complement rather than unintentionally dominate your broader strategy.

Once you’ve mapped each ETF to a role, take a step back and look at how they work together.

If two investments perform a similar role, that isn’t necessarily a problem. The question is whether each provides something distinct. They might track different markets, use different investment approaches or give you exposure to different companies, sectors or sources of return.

This is also an opportunity to look at your overall allocations. As markets move and you add investments over time, the balance of your portfolio can shift away from what you originally intended.

If your review leads you to consider consolidating or rebalancing, you don’t need to make changes all at once. You may decide your existing holdings still make sense, adjust where future contributions are directed, or make changes gradually over time.

Remember that selling investments may trigger a capital gains tax event. Before making any decisions, consider the tax implications and speak with a financial adviser if you’re unsure.

If you’d rather leave the portfolio decisions to an investment team, Betashares Managed Portfolios offer that option. They’re professionally managed, low-cost diversified portfolios, so you don’t have to choose individual ETFs or rebalance the mix yourself.

Once you’ve stepped back and looked at the whole portfolio, three questions can help bring the framework together:

There’s no set number of ETFs that makes a portfolio well diversified. What matters is what you’re exposed to, how those exposures interact and whether they align with what you’re trying to achieve.

As your portfolio grows, periodically revisiting the role of each investment can help you keep sight of the bigger picture. The goal isn’t necessarily to own fewer ETFs. It’s to understand why you own the ones you do and how they fit together.