My investing diary: why I added a second ETF (and almost made things worse)

Category: Investing

Thomas | financial enthusiast

In 30 seconds: One world ETF was supposed to be enough. Then I started questioning its US exposure, discovered emerging markets and nearly turned a simple portfolio into an unnecessary science project. Here is what a second ETF actually changes.

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My investing diary: day 2.

Last time, I explained why my first investment was a boring world ETF. One fund, one savings plan, no clever stock picking.

Simple. Almost suspiciously simple.

But after a while, I started looking at what was actually inside that ETF. And something bothered me.

I thought I owned the world.

Turns out, I mostly owned America.

Not necessarily a bad thing. But it raised a question I couldn’t ignore: was I diversified, or was I just comfortable?

The problem with calling something “World”

An MSCI World ETF sounds like the ultimate diversification machine. Thousands of companies? Actually, the standard MSCI World Index covers roughly 1,300 large and mid-sized companies across developed markets. The exact number changes.

Pretty good.

Except that the US represents the majority of its market capitalization. And the biggest American technology companies carry enormous weight.

Apple, Microsoft, Nvidia, Amazon. Familiar names.

I already followed several of them individually. Suddenly, I realized that my portfolio and my watchlist were telling the same story.

American technology was everywhere.

Then I noticed something else.

China? Missing.

India? Missing.

Brazil? Also missing.

Not because these countries have no interesting companies. They simply aren’t classified as developed markets in the MSCI framework.

Damned. My world ETF had a geography problem.

Or maybe my expectations were the problem.

Enter the emerging markets ETF

Naturally, I started researching emerging markets.

The idea sounded reasonable. Keep my existing world ETF and add a second fund covering countries that weren’t included.

India, Taiwan, China, Brazil and others.

Suddenly, my portfolio would represent a much larger part of the global stock market.

Problem solved?

Not quite.

Emerging markets bring different risks. Political uncertainty, currency movements, corporate governance issues and sometimes weaker investor protections.

A company can be profitable and still become a terrible investment because regulations change overnight.

I also learned that emerging markets aren’t automatically cheap, and cheap markets don’t automatically deliver better returns.

That’s an important distinction.

Buying something because it has underperformed isn’t a strategy. Sometimes there is a perfectly good reason for the underperformance.

Still, I liked the idea of owning businesses outside the developed world.

Not because I expected them to outperform next year.

Because I didn’t know which region would win over the next twenty years.

And that uncertainty was exactly why diversification appealed to me.

Two ETFs don’t automatically mean better diversification

Here is where things became interesting.

I could add an emerging markets ETF. Or I could simply replace my existing fund with an MSCI ACWI or FTSE All-World ETF.

Those indices already combine developed and emerging markets.

One product. Broader geographic coverage.

Even less work.

So why bother with two?

Control.

With separate ETFs, I can decide how much exposure I want to developed and emerging markets. I can adjust that allocation without changing my entire investment approach.

Sounds great.

Until I remember that every additional decision creates another opportunity to make a mistake.

If emerging markets perform badly for five years, will I keep buying?

Or will I convince myself that the money belongs somewhere else?

I know how tempting the second option can be.

The allocation trap

At this point, I discovered another problem.

How much emerging markets exposure is enough?

Ten percent? Twenty? Thirty?

There are arguments for different allocations.

Market-cap weighting gives one answer. GDP weighting gives another. Personal convictions produce an almost unlimited number of answers.

I spent far too much time reading about the perfect ratio.

Then I realized something uncomfortable.

I was trying to optimize a decision that nobody could optimize with certainty.

The global economy changes. Index weights change. Countries move between classifications. Entire industries rise and fall.

A fixed allocation is not a scientific truth.

It is a choice.

And if I choose to overweight emerging markets relative to their share of global stock market capitalization, that’s an active investment decision.

Nothing wrong with that.

But I should stop pretending it’s purely passive investing.

What about the costs?

Two ETFs also mean checking a few practical details.

First, the total expense ratio. A difference of a few basis points sounds irrelevant, but fees accumulate over decades.

Second, tracking difference. The advertised fee doesn’t tell the entire story. What matters is how closely the fund actually follows its benchmark after costs.

Third, taxes and trading expenses.

Depending on the country, broker and account structure, additional transactions can create extra costs or administrative work.

And finally, rebalancing.

If one ETF grows faster than the other, my original allocation changes.

I can rebalance by selling and buying. Or, more conveniently, redirect new savings contributions toward the underweight fund.

Neither approach is automatically superior. Taxes, transaction costs and portfolio size matter.

What I don’t want is a monthly ritual of adjusting percentages because one market moved by two percent.

That sounds exhausting.

The uncomfortable truth about diversification

The more I researched, the clearer something became.

Diversification doesn’t guarantee higher returns.

It doesn’t even guarantee that my portfolio will fall less during every market crash.

Global equity markets can decline together. Emerging markets can be especially volatile during periods of financial stress.

Diversification is about reducing dependence on individual outcomes, not eliminating risk.

A second equity ETF also doesn’t replace an emergency fund or create the stability that high-quality bonds or cash might provide.

That distinction matters.

I can own companies across fifty countries and still have a portfolio that is almost entirely exposed to stock market risk.

More countries don’t magically mean less volatility.

What I would tell my younger self

If I were starting again, I would ask three questions before adding another ETF.

What exactly is missing from my current portfolio?

Does the new fund solve that problem, or does it just make my portfolio look more sophisticated?

Will I stick with the allocation when it underperforms?

That last question is probably the most important.

An investment strategy that only works when everything goes up isn’t much of a strategy.

My original world ETF was boring on purpose. Adding another fund should have a clear reason, not just satisfy my urge to do something.

Sometimes the best portfolio improvement is leaving everything alone.

Annoying, isn’t it?

Where I stand today

I still like the idea of a simple, globally diversified ETF core.

Whether that means one all-world fund or two complementary ETFs matters less to me than understanding what I own, keeping costs reasonable and maintaining a consistent savings plan.

The real challenge isn’t finding the perfect ETF combination.

It’s avoiding the temptation to redesign the portfolio every time I read an interesting article.

And yes, I realize the irony of writing an article about that.

Next time, I want to look at something even more uncomfortable: why checking my portfolio too often can make me a worse investor.

What about you? Would you rather own one global ETF or build your own allocation with two or three funds?

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This is a personal-style editorial draft for Thomas’ review, not investment advice. Investments carry risk, including possible loss of capital.

Do your own research before making financial decisions.