I recently did a presentation on growing an ETF portfolio from a single ETF to 10. It seemed a simple concept, but I learnt a huge amount about a topic I thought I knew all the important things about.
Before I go into the details, the basic construct of the portfolio was nothing new: a core holding of 70%–80% in a single diverse ETF and then strategic satellite holdings to either add what’s missing or increase protection or return.
The first point is something I have long known: one good diverse global ETF is really all we need. I hold the 10X Total World Stock Feeder ETF. It has more than 10,000 holdings across developed and emerging markets (EMs) with a smattering of small caps. It is light on US and tech and has less concentration than an MSCI World or S&P 500 ETF. In the short term this has reduced returns, but as a long-term holding I believe it will deliver returns well ahead of inflation and create wealth.
But the lessons came with what we should add. I had assumed that 10 would be a good number of ETFs for a diverse core/satellite portfolio. But no, 10 is far too many; seven is enough. Five or even three can do everything that’s needed really.
This is in part because I had assumed income would be an important part of the 10 ETFs. But the more I thought about it, the more I understood that income is not needed unless you’re in or near retirement. For pretty much anybody more than five years from retiring, going all in on equity works best. Sure, you may have some income ETFs as a savings tool for a future expense, but otherwise there’s no real need.
Then came the decision about what satellite positions to add. Some EMs? Why? We already have plenty as South Africans, and the reality is that EM ETFs are never about India Inc or the like. Recently, it’s all been South Korean chip manufacturers, and history suggests there is always some skew that means EM exposure just adds concentration, in this case to the AI tech trade.
Should we hold local? Yes, a local ETF does work. The top 40 is only about a third local; resources, luxury and Chinese tech make up the rest. All of these are low weighted in a global ETF, so the top 40 is doing some real work. Another surprise.
Property also adds diversity. Interestingly, data supported local over offshore as our real estate investment trust ETFs have a lot of non-South Africa exposure, mostly Europe. This fits best into a tax-free account for higher taxpayers as the dividends are income.
