Exchange Traded Funds (ETFs) Have Changed How People Invest
ETFs have grown at an incredible rate since they first became publicly available in the U.S. back in 1993. A record $1.1 trillion in net new ETF shares were issued in 2024 alone, according to the Investment Company Institute, up from $597 billion the previous year.1
That growth has led millions of ETF investors to build portfolios full of tickers, operating on a simple assumption: the more exchange traded funds (ETFs) you own, the more diversified you are.
In most cases, that assumption is simply wrong.
At InvestLane, we’ve been covering exchange-traded funds in depth because they’re one of the most accessible tools for everyday investors. Unlike mutual funds, ETFs trade on a stock exchange throughout the day, with their market price updating in real-time.
That means ETF shares can trade at market prices that may or may not match the fund’s net asset value, while mutual fund shares only get priced once a day.2 That accessibility makes ETFs super easy to buy and also easy to over-accumulate.
In this article, we cover what most investors get wrong, the ideal ETF count for most situations, when adding more makes sense, and real portfolio examples.
What Do Most Investors Get Wrong With ETFs and Mutual Funds?
Is Owning More ETFs the Same as Better Diversification?
The most common mistake ETF investors make is assuming that more tickers equals better diversification. But buying more ETFs without checking what’s inside creates overlap, not diversification.
Here’s a path that plays out all the time. An investor follows Warren Buffett’s advice and buys VOO, Vanguard’s S&P 500 ETF. That’s a solid start, right? Then they add VTI for small and mid-cap exposure. Now they own two Vanguard ETFs and feel more diversified.
The problem is that VOO and VTI have roughly 88% overlap by weight. ETFs compared on an overlap basis will usually reveal redundancy far more clearly than looking at expense ratios or net asset value alone.
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How Do Index ETFs End Up Holding the Same Stocks as Actively Managed Funds?
Over time, that investor might add VUG for growth, then VGT for tech. Now there are four Vanguard ETFs in the portfolio, each with its own ETF’s portfolio of underlying investments. But the top positions across all four are the same: Nvidia, Apple, and Microsoft. In the growth and technology-focused funds, those three make up well over 40% of the weight. That’s not diversification across asset classes, it’s a concentrated bet on US large-cap tech made four times over.
That’s where correlation comes in. Assets with a correlation near +1 pretty much move identically. Most ETFs in this large-cap category move together, so much that broad market funds tracking similar benchmarks showed this clearly in 2008 and again during the dot-com period. When the market’s going down, highly correlated funds don’t deliver the protection investors expect. What matters isn’t the investment strategy so much as what the funds actually do. Investing involves risk, and knowing what you own is the first step toward managing it.
How Many ETFs Do Most Investors Actually Need?
Could One ETF Be Enough?
For a long-term investor with their finances in order and a time horizon running into five years plus, a single broad ETF might be all they need. A fund like VTI or VOO gives you instant exposure to hundreds of stocks across every major sector of the U.S. economy in a single, easy purchase through your standard brokerage account or IRA. No need to hire a portfolio manager or wade through the complexity of actively managed mutual funds.
Warren Buffett put his money where his mouth is by betting $1 million that a single S&P 500 index fund would outdo five hand-picked hedge funds over ten years. In his 2017 Berkshire Hathaway shareholder letter, Buffett reported that the index fund delivered a total gain of 125.8% over that decade, while the five actively managed funds returned anywhere from 2.8% to 87.7% after fees. Not one of them came close to the index fund’s 125.8%.3
That makes a pretty strong case for keeping things simple.
What ETFs Fit Most Long-Term Investment Strategy Goals?
If you’re looking for a bit more coverage, three to five ETFs is a good sweet spot. A core broad equity ETF, one or two tilts towards other asset classes, and possibly one low-correlation diversifier, that’s about what everyday investors actually need.
Once you get past the five ETF mark, each new addition needs a clear purpose. If you can’t clearly see what unique value this fund adds to your portfolio, it’s probably best to skip it. InvestLane’s lazy ETF portfolio is a good example of how five funds can cover some wide ground without unnecessary overlap.
When Does It Actually Make Sense to Add More ETFs?
What ETFs Fill Genuine Gaps in a Portfolio?
The secret is identifying what the core fund is actually missing. Adding VTI to an existing VOO position is not exactly going to fill any gap, after all, they have an 88% overlap. A real gap-filler addresses something the core ETF just can’t touch.
For someone holding an S&P 500 ETF, genuine additions include a small-cap value fund like AVUV, which targets smaller companies with different return characteristics. Or a mid-cap fund for that middle tier. International developed markets are another real gap, since most domestic equity ETFs don’t hold any foreign stocks at all. And then there’s VT, which covers both U.S. and international stocks with over 10,000 holdings in a single fund, that’s a complete equity strategy on its own, but between VT and VTI there is a 59% overlap by weight.
When Do Bond ETFs and Actively Managed Funds Belong in a Portfolio?
Gold ETFs like GLD or GLDM and Bitcoin ETFs like IBIT behave in a totally different way to U.S. stock market funds. They don’t move in lockstep with the S&P 500, which is the point. Fixed income and bond funds serve a similar role, since bond prices and equity prices often move in opposite directions during periods of market volatility. Any bond funds in that space, like short-term Treasury ETFs, are among the most common ways investors add this ballast.
Ray Dalio built his all-weather portfolio concept around the idea of holding multiple uncorrelated asset classes and alternative investments so that when one drops, the others don’t necessarily follow. That’s a different approach from Buffett’s two-fund simplicity, and both can work. The constraint is allocation size. These diversifiers should stay a small portion of the portfolio. They reduce downside risk, but they’re not the primary growth engine.
For investors looking for a single-fund solution that provides exposure to nearly all sectors all at once, VT is hard to beat for its simplicity.
Should You Add Dividend ETFs or Sector Funds to Your Portfolio?
Dividend ETFs like SCHD and DGRO are a winning combination for investors looking for a steady income stream, they can provide that and some stability, but still tend to move up and down with the market – so don’t rely on them to stabilize your portfolio like bond funds do. The tax benefits of dividend ETFs, meanwhile, can vary considerably depending on where you hold them.
Concentrated sector funds are a different story. They are way riskier than a broad market ETF and you shouldn’t depend on them as your main investment play. iShares ETFs and other super-focused funds in areas like tech are for the truly convinced investor, it is best to keep them to a small allocation. If you’re feeling strongly enough about a particular sector to want an actively managed ETF or an active ETF in that area, go for it, but for the most part, your ETFs should be broad and ultra-low-cost. ETFs trade all day, so you can easily see how they fit in with your existing investments, and sell off any overlap you spot. As for taxes, most broad ETFs get a more favorable capital gains treatment than other investments like actively managed funds, and they also tend to produce lower capital gains distributions. Make sure you take a good look at the summary prospectus before adding any new fund to the mix.
Portfolio Examples: What Do Different ETF Counts Look Like?
What Is the Warren Buffett 2-Fund Investment Strategy for a Brokerage Account?
The Warren Buffett 2-fund portfolio approach in practice: 90% of your money in a broad S&P 500 ETF like VOO,4 paired with 10% in a short-term treasury investment.
Low expense ratios, minimal capital gains distributions, low management fees and tax efficiency that last in the long run. The average equity mutual fund expense ratio was 0.40% back in 2024 according to ICI data, while the expense ratios on most broad index funds are a fraction of that. You can pick up ETF shares in a broad S&P 500 ETF through just about any brokerage account, and the capital gains treatment is generally more favorable than comparable mutual funds.
For investors who want global equity coverage without the hassle, a single position in VT will cover the entire world stock market – one fund, one brokerage account and no overlapping positions to worry about.
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What Does a 3-5 ETF Portfolio Look Like and How Do Expense Ratios Compare?
A growth-oriented three-fund setup might combine a total U.S. market ETF with a large-cap growth fund like QQQ or VUG, then add international exposure via VEA or VXUS. Each has a distinct role to play, together forming a pretty complete investment program with clear investment objectives across domestic growth, international stocks and the entire equity market. This approach mirrors the well known Bogleheads 3-fund portfolio, a time-tested framework worth knowing by name.
Adding a small-cap value ETF like AVUV and a gold fund like GLDM brings the total to five. For investors who want broader U.S. market coverage instead, VTI covers the entire domestic market in one fund and pairs cleanly with any of these additions.5 Most ETFs in this lineup offer a tax efficient structure with expense ratios far lower than comparable mutual funds. Each of these five funds has a specific job the others aren’t already doing.
What Does a 10-ETF Portfolio Look Like?
For investors who want a fully deliberate approach, a 10-ETF setup built around three categories can work well. The foundation is a broad S&P 500 ETF paired with a large-cap growth ETF. Strategic tilts fill in around it: a momentum ETF like SPMO, mid-cap exposure, small-cap value through AVUV, and focused positions for investors with specific conviction. Diversifiers round things out with an international fund, gold, and a Bitcoin ETF for those comfortable with its volatility as an alternative investment.
Managing a 10-fund portfolio takes real dedication: an investor needs to have a good understanding of what each fund is holding, how capital gains distributions will be handled across different investment accounts, and what role each position plays. When other ETFs start duplicating the existing exposure, the right move is to sell those securities that overlap rather than just holding onto them out of habit.
ETFs, Asset Allocation, and Your Next Step
Most investors succeed with one to three core ETFs. Those who want more deliberate diversification can build well with four to ten. Beyond that, complexity rarely adds enough to justify it. The simplest portfolios tend to be the most tax efficient ones too, since fewer funds means fewer capital gains events and lower ongoing management fees across the board.
The most useful exercise is simple: list every ETF currently owned and write one sentence explaining what it does that nothing else already covers. If that’s hard to answer, that fund probably doesn’t need to be there. This matters more than most investors realize because the real cost of owning too many funds goes beyond complexity. It includes overlapping capital gains distributions, redundant management fees, and the same exposure to mutual funds or ETFs already held elsewhere.
A summary prospectus shows any fund’s investment objectives and portfolio securities in plain language, making it easy to spot where two funds are doing the same thing.
Before any of this though, the financial foundation matters most. Having an emergency fund in place, retirement accounts funded, and short-term cash covered is what makes it possible to stay invested through rough patches. The best ETF strategy doesn’t work if life forces a sale at the bottom.
As Charlie Munger put it: “The big money is not in the buying and the selling, but in the waiting.” A smaller number of well-chosen ETFs, held consistently over time, is usually more than enough to build lasting wealth.
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