Don't invest in similar funds

NO CLUTTER: ADVISORS ANSWER READER'S QUESTION AND DESCRIBE TRUE DIVERSIFICATION

- Matthew Marrian and Dawn Ridler

The question: What are the drawbacks of investing small amounts into multiple similar funds, such as comparable passive ETFs or actively managed funds, rather than consolidating into one? Assuming similar performance over time, is there any real benefit or potential disadvantage to spreading your investment across correlated funds instead of focusing on a single one?

Matthew Marrian, chief operating officer and wealth manager at InvestSense: At first glance, spreading your money across similar funds might feel like good diversification. But when those funds are closely correlated, especially in the passive space, you're likely creating clutter without adding value. And it can work against you.

Passive duplication is not diversification. If you hold three ETFs that all track the same or similar indices, like the S&P 500 or JSE Top 40, you're not diversifying. You're duplicating.

These funds will perform almost identically with different fees, tracking errors and structures. You are taking the same risk, packaged in slightly different wrappers.

More funds mean more fees and complexity and even slight differences in cost add up.

Spreading capital across similar funds may also prevent you from qualifying for platform fee breaks or better administration rates.

It makes rebalancing harder and creates noise in performance reporting, often leading to poor decision-making.

Tax inefficiency and unnecessary administration. The more fragmented your portfolio, the more difficult it becomes to track distributions, calculate capital gains and manage tax planning. Simpler is often better when it comes to post-tax outcomes and long-term oversight.

The argument changes in the active space. If you are deliberate about it, owning multiple funds can provide true diversification. This comes down to investment style.