ETF portfolio management: Do-it-yourself or outsource it?

If you want to invest in a passive ETF portfolio then you have three choices:

• Build your own custom ETF portfolio via an online broker
• Select an off-the-peg solution through a robo-advisor
• Opt for an ETF fund-of-funds – this is an ETF that invests directly in a portfolio of ETFs for you

• Build your own custom ETF portfolio via an online broker
• Select an off-the-peg solution through a robo-advisor
• Opt for an ETF fund-of-funds – this is an ETF that invests directly in a portfolio of ETFs for you

• Build your own custom ETF portfolio via an online broker
• Select an off-the-peg solution through a robo-advisor
• Opt for an ETF fund-of-funds – this is an ETF that invests directly in a portfolio of ETFs for you

Each route has its pros and cons depending on how much hand-holding you need, but DIY has the edge in the following areas:
 

Flexibility of ETFs

You decide where your money goes when you’re in complete control. If you decide that the US looks overvalued then you can choose to sell some of your holdings and take the profits. If you’d like to reduce your exposure to currency risk as you get older then you can direct more of your contributions into UK ETFs. After a stock market fall, you can devote your funds to equities while they’re ‘on sale’ and pass on fixed income for a time.

By contrast, an algorithm or fund-of-funds manager will tend to be less flexible – sticking to their strategies and applying one-size-fits-all solutions that may not be a good fit for you.
 

Bespoke portfolios

When you call the shots, you’re able to create an ETF portfolio that precisely fits your risk profile and investing views. If you’d like to diversify more widely into gold or gold miners – you’re in charge. If you’re worried about inflation then you can upweight your position in index-linked bond ETFs, or commodities or energy ETFs. If you’d like to express your ethical values then you can choose socially responsible ETFs.

You don’t get this luxury with packaged solutions that achieve scale by funnelling customers into particular boxes. You can’t switch out an ETF you don’t like for one you do. In contrast to the restaurant industry, you can’t have things your way.
 

Low cost of ETFs

Naturally, DIY ETF investing enables you to hammer down costs. You can choose the cheapest ETFs in any category and quickly take advantage of the intense price competition between providers offering me-too products, especially in Core ranges.

The same applies to platforms – you retain the freedom to pick the one that offers the best platform and trading fees for the individual size of your portfolio and trading frequency. Managed solutions don’t provide these advantages. Not only are you paying their salaries, but you’re also paying towards their regulatory burden, marketing expenses, office rent and profit margin. And that’s on top of the ETF fees you pay via DIY. Moreover, while you can switch your loyalties to the best product on a dime, automated and managed solutions may be hemmed in by their business relationships and need for economies of scale.
 

ETFs and taxes

Standard solutions are not tax efficient if you hold the wrong products outside of your tax shelters. You must be particularly wary if you end up with bond holdings in taxable accounts because your ISA and SIPP allowances are used up.

Bond interest is taxed at your marginal income tax rate while equity dividends are taxed at a more benign rate and have a higher tax-free allowance. For that reason, bond holdings often get first dibs on investors tax shelter space. Ensuring your ETFs maximise your tax efficiency may well require a custom solution. Especially as you can only harvest capital gains outside of your ISAs and SIPPs and fund-of-funds do not allow you to offset losses against gains for CGT purposes.
 

Simplicity of ETFs

Standard solutions can add complexity without gaining much in diversification. Some automated asset management portfolios hold well over ten ETF positions. This may look impressively complex but it adds to the administrative, management and cost burdens of the firm. The same level of diversification may well be achieved through a simpler product such as a World ETF that contains much the same spread of securities as individual country ETFs. Often professional investors are forced to over-complicate matters because of diversification regulations that don’t apply to an individual investor.
 

Becoming your own investment manager

Nobody will ever care more about your investments than you. By taking matters into your own hands, you will save money and can craft the portfolio that best fits your individual circumstances. If you’re ready to take charge, then congratulations! Our Strategy Planner and other tools are here to help you quickly assemble the ETF portfolio you need.

Our tip: You can maximise your diversification and lower your trading costs by choosing a World / All-World ETF, especially when you’re investing relatively modest amounts on a monthly basis.
 

 Outsourcing your portfolio versus DIY investing