ETF essentials ยท 2 minute read
Rebalancing an ETF portfolio: why and when?
The short answer
Rebalancing means adjusting investments back towards their intended proportions after market movements cause them to drift. It helps maintain the chosen mix of risk rather than maximise short-term returns.
Why it matters
Different ETFs will not rise and fall at the same rate. Over time, the strongest performer can become a much larger part of the portfolio and change its risk.
Rebalancing can be done by:
- Putting new money into investments below their intended share of the portfolio
- Reinvesting income selectively
- Selling some of an investment above its intended share and buying another
- Reviewing at set intervals or when weights move beyond agreed ranges
Buying and selling can create dealing costs, spreads and tax consequences. Rebalancing too frequently may add cost without materially improving the portfolio.
A simple example
A portfolio begins with 60% in an equity ETF and 40% in a bond ETF. After equities rise, the mix becomes 70% and 30%.
Rebalancing would move the portfolio back towards its intended allocation, either through new money or trades.
What to check
- What allocation was originally intended?
- How far have the weights moved?
- Can new contributions restore the balance?
- What trading and tax costs could arise?
- Is the original allocation still appropriate for the objective?
Key term explained
Asset allocation is the proportion invested in different types of assets, such as equities and bonds.
Rebalancing maintains a plan. It should not become a reason to trade constantly in response to market headlines.
A written allocation and review rule can make the process more consistent and reduce unnecessary decisions during volatile markets.