ETF v praxi
How to Rebalance Between Multiple ETFs in Practice
Key takeaways
- Rebalancing restores target weights in a portfolio after different ETFs have grown or fallen at different rates.
- The cheapest method is to direct new contributions to the underweight position rather than selling the overweight one.
- Selling may trigger a tax liability — in the Czech Republic a three-year holding period qualifies for income tax exemption.
- Rebalancing too frequently is costly; once a year or when a position drifts by more than 5–10 percentage points is a sensible approach.
- Some robo-advisors offer automatic rebalancing; otherwise it is a manual task.
Rebalancing is the process of restoring a portfolio's target allocation after different ETFs have drifted from their original weights due to differing performance. Without periodic correction, a portfolio can unintentionally transform into something quite different from what you intended.
Why Drift Occurs
Consider a portfolio that is 80% equity ETF and 20% bond ETF. If equities rise sharply in a given year, their weight may shift to, say, 88%. The portfolio is suddenly riskier than planned — without any conscious decision on your part.
How to Rebalance Without Selling
The smartest rebalancing technique is to direct new money to the underweight position: instead of selling the overperforming ETF, you redirect your regular contribution to the lagging part. The result is the same — weights align — but no transaction costs or tax liability arise.
When and How Often to Rebalance
- Calendar-based: once a year, always in the same month — simple and predictable
- Threshold-based: when a position drifts more than 5–10 percentage points from target
- Hybrid: a combination of both — rebalance at the annual review and also on large swings
Rebalancing too often adds transaction costs and can reduce overall returns. Research suggests an annual cycle is optimal for most retail investors.
Rebalancing Across Multiple ETFs
If you hold three or four ETFs — global equities, emerging markets, bonds, perhaps commodities — track the total weight of each asset class, not just individual fund performance. A simple spreadsheet in Excel or Google Sheets makes this easy. For how to build a portfolio from scratch, see the guide how to build your first portfolio.
FAQ
What is portfolio rebalancing?
Rebalancing restores the originally targeted weights of portfolio components. After ETFs perform differently, their shares change — rebalancing returns them to the planned allocation.
How to rebalance without triggering a tax liability?
Direct new contributions to the underweight position rather than selling the overweight one. Weights align without any sale and without a potential tax event. Selling an ETF before the 3-year holding period may trigger a tax liability.
How often should I rebalance?
Once a year or when a position drifts by more than 5–10 percentage points is a sensible approach. Rebalancing too often adds unnecessary costs. Directing new contributions to the underweight position is more efficient than frequent sales.