Been buying two broad funds for three years assuming I was diversifying. Looked properly this week and their top holdings are nearly identical and the correlation looks close to 1. One has a slightly lower fee. Do I just sell one and consolidate, or is there a reason to hold both? There's a gain in the more expensive one so selling isn't free.
Three years of consistent buying into broad funds is the hard part and you've already done it. The optimisation you're asking about is worth a rounding error next to that.
Two overlapping broad funds isn't a mistake worth agonising over — you weren't diversified in the way you thought, but you were also never concentrated in anything dangerous. It's tidiness, not risk.
One thing to avoid: if the funds are close enough to be considered substantially identical and you sell one at a loss to buy the other, some tax systems will disallow the loss. Doesn't apply to you since you have a gain, but worth knowing before you get clever later.
Worth checking they're genuinely near-identical rather than just having the same top ten. Two funds can share their largest holdings and still differ meaningfully in the tail — one might include mid caps, or exclude a whole region. Compare the number of holdings and the regional breakdown, not just the top ten table.
Then the broader one is arguably doing something the other isn't, even if the returns track closely. Their behaviour diverges most in exactly the periods you'd care about.
Good point. One holds about 500 and the other about 3,600, so there's more difference than I assumed from the top ten.
@sinking_funds_su · 7mo ago · 3 replies
Don't sell, just stop buying. Redirect all new money into the cheaper fund and let the other one sit. You keep the tax deferred, the fee difference on existing holdings is usually small in absolute terms, and over a few years the cheaper fund becomes the majority of the position anyway.
Run the actual numbers before deciding, though. If the fee gap is 0.03% versus 0.05% on a £40k holding, that's £8 a year and absolutely not worth realising a gain over. If it's 0.05% versus 0.55%, that's a different conversation entirely.
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@sinking_funds_su · 7mo ago
Yes. £39 a year against a tax bill today is an easy no. Revisit if you ever have a year with low income or capital losses to offset.
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@stipend_sam · 7mo ago
It's 0.07 vs 0.22 on about £26k, so roughly £39 a year. Sounds like stop-buying is the right call rather than selling.
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