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The ins and outs of doubling up on shares

Often get asked about buying a share that already exists within an exchange-traded fund (ETF) or unit trust you hold. For example, you have a Top40 ETF but you do want to specifically buy Richemont* as well. The concern is that you’re duplicating the Richemont holding. 

The answer is that you have to know your ETF. So let’s set the ground rules and gain a deeper understanding of what we’re doing. 

Determining the weighting of the stock in the ETF

First, what shares do you have within your ETF portfolio? We need to look through the ETF (or unit trust) and see what it holds. Equally important is knowing what the weighting of each stock is. 

If you hold a normal market-cap weighted Top40 ETF, Richemont has a weighting of almost 8% in the index, while an Indi25 ETF has just over 13% in Richemont. These are very different levels, and that is exactly why it has important to know your ETF and why you need to look inside to see exactly what it contains. 

It is also why I prefer the equally weighted CSEW40*, as each stock has the same 2.5% weighting and it does not favour any one stock over another, effectively leaving the favouring of individual stocks to me rather than the index weighting. 

So, the ETF you hold will to a large degree determine whether you should be adding a specific stock to your individual stock portion of your portfolio. 

With the Top40 and Indi25 examples above I would be cautious about adding extra Richemont shares as you already have a fair holding of the stock. Rather look at those stocks that have a low weighting – below 1% − and see if it is worth increasing the stake in any of them and leave the already large holdings as they are, using just the ETF for your position. 

The ETF within your portfolio

But what is also important is how much the ETF or unit trust makes up towards your total portfolio. In my case ETFs are just over 50% of my total portfolio with another 30% going into 10 to 12 quality shares. So, if I held only CSEW40, the ETF part of my portfolio would result in a holding of 1.25% in Richemont (the ETF is half of my portfolio and the ETF holds 2.5%, so half of that is 1.25%). This is a small percentage, which gives me enough room to add to the stock if I think it is one of the best to own. 

Having looked through your ETF or unit trust, you then decide what the best of the best stocks to add are, and by adding you are up-weighting these stocks within your portfolio. So I do add an extra position in Richemont as it is a stock I believe will perform well over the long term. But note that I don’t go crazy, adding only another 3% to 4%, which would give Richemont a total weighting of between 4.25% and 5.25%.

So the bottom line is that I will add a stock that is already in an ETF or a unit trust I hold to my portfolio, but only after some digging to see what percentage of my overall portfolio it makes up. And as always I prefer the equally weighted ETF as it lets me decide which stocks to up-weight rather than deciding for me based purely on the market cap of the stock. At the end of the day I hold only six Top40 stocks, meaning the remaining 34 stocks in the Top40 sit at their ETF weighting. These six stocks are the ones I consider to be the best of the best. 

*The writer owns CSEW40 and Richemont shares. 

This article originally appeared in the 16 February edition of finweek. Buy and download the magazine here.

 

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