How Many ETFs (or Mutual Funds) Do You Really Need?
By John H. Robinson, Financial Planner (April 2025)
I decided to write this article because mutual fund and ETF wrap portfolios held at other institutions often show up on my radar when I am hired to do a new comprehensive financial planning review. These are not typically portfolios that the people have constructed from scratch, but rather bundled, fee-based managed portfolio models constructed by the institution where their accounts are held. They are typically comprised of 15-30 different ETFs and/or mutual funds.
This begs the question of just how many ETFs are necessary to build a well-diversified, efficient portfolio? Contrary to the belief that more funds always mean better diversification, research and expert consensus increasingly support the idea that a small number of broad ETFs is not only sufficient but often optimal for most investors.
The Case for Fewer ETFs
1. Broad Diversification with a Few Funds
Modern ETFs are designed to offer instant diversification. For example, a single total market ETF can provide exposure to thousands of stocks, while a global bond ETF covers a wide range of fixed-income securities. Vanguard research and industry analysis consistently show that holding even a small number of broad-market ETFs can deliver effective diversification across asset classes, minimizing risk and capturing market returns efficiently[1].
2. Diminishing Returns from Additional ETFs
Academic research highlights that the benefits of diversification plateau after a certain point. A 2024 thesis on ETF portfolio construction found that the most significant risk reduction occurs with the first few dozen holdings, and that adding more assets beyond 100–300 stocks yields only minimal additional benefits[2]. Since many ETFs already contain hundreds or thousands of securities, adding more ETFs often leads to overlapping holdings and unnecessary complexity[3].
3. Simplicity and Cost Efficiency
Fewer ETFs mean easier portfolio management, lower trading costs, and less risk of accidental overlap (owning the same stocks through multiple funds). This simplicity makes it easier to monitor, rebalance, and stick to a disciplined investment plan[3].
What Does the Research Say?
Statman (1987) and subsequent studies found that the majority of diversification benefits are realized with 30–50 stocks, and that adding more does little to further reduce risk[2].
A 2024 study using the Vanguard Russell 3000 ETF concluded that after about 100–300 stocks, the marginal benefit of additional diversification becomes negligible[2].
Vanguard and Schwab both recommend portfolios with as few as 2–8 ETFs, covering major asset classes like U.S. stocks, international stocks, and bonds[4][1].
Over-diversification, or owning too many ETFs, can dilute returns and create unnecessary management burdens without meaningful risk reduction[2][3]
Conclusion
For most investors, a small, thoughtfully chosen set of ETFs-typically between two and six-can provide all the diversification and asset class exposure needed for a robust, long-term portfolio[4][1][3]. Adding more ETFs rarely improves outcomes and can actually complicate management and dilute returns. Focus on broad, low-cost funds, and remember: when it comes to ETFs, less is often more.
So why, then do all of these institutions include 20+ funds in their portfolio models. My guess is that the creators are intentional in creating the appearance of sophisticated modeling. If they used only three or four, consumers might balk at paying fees to manage the portfolio. With many different funds in the account that are being regularly rebalanced, it makes it seem like the insitution is earning is money. In my opinion, this just adds unnecessary complexity to the portfolio.
When people ask me to recommend a basic portfolio model, here is my “patented” response -
For the stock portion of the model -
50% large cap index fund/ETF
15% mid-cap index
15% small-cap index
20% international stock index.
For the bond/cash allocation – use individual CDs, treasuries, and/or money market funds. It does not need to be much more complicated than that.
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