Rebalancing Your ETF Portfolio: When, How, and the Tax Consequences (2026)
How to rebalance an ETF portfolio in Australia without triggering unnecessary CGT. Covers when to rebalance, contribution-based rebalancing, and what happens when you must sell to rebalance.
An ETF portfolio drifts over time as different asset classes grow at different rates. Rebalancing — returning the portfolio to its target allocation — is necessary but must be done thoughtfully to avoid unnecessary CGT events.
Quick answer: Rebalance using new contributions first (no CGT). Only sell to rebalance if allocation has drifted more than 5–10% and you cannot rebalance through contributions alone. One-ETF investors (DHHF/VDHG) never need to rebalance — the fund does it internally.
When Do You Need to Rebalance?
One-ETF investors (DHHF/VDHG): Never. These all-in-one ETFs rebalance internally — the fund manager maintains the target allocation automatically. No action required by you.
Multi-ETF investors (VAS + BGBL, VAS + VGS, etc.): Your portfolio will gradually drift as different ETFs perform differently. If VAS targets 30% and global ETFs rise faster, VAS may drift to 24% of your portfolio over time. You need to correct this periodically.
How much drift is acceptable? Most investors tolerate 5–10% drift from target before rebalancing. Tighter tolerances (2–3%) require more frequent action and potentially more CGT events.
How often to check: Once per year (July 1 after EOFY) is sufficient for most investors. Checking more frequently typically leads to unnecessary trading.
The Tax-Efficient Way to Rebalance: Contributions First
The most important rule: always try to rebalance through new contributions before considering selling.
If your VAS allocation has drifted from 30% to 24%, direct the next several monthly contributions entirely to VAS until it returns to 30%. No selling required. No CGT triggered.
Example: $200,000 portfolio with target 30% VAS / 70% BGBL. Current allocation: VAS $45,000 (22.5%), BGBL $155,000 (77.5%). VAS is $15,000 underweight ($60,000 target − $45,000 actual).
Solution: Direct next 15–20 monthly contributions ($500–$1,000/month) entirely to VAS. No selling. No CGT.
This works as long as:
- The drift is not extreme (>15–20% off target)
- You have sufficient regular contributions to correct the drift in a reasonable timeframe (6–12 months)
When You Must Sell to Rebalance
If the drift is large enough that contributions alone cannot correct it reasonably, or if you have stopped making regular contributions, selling the overweight ETF and buying the underweight one is necessary.
The CGT implication:
Selling the overweight ETF triggers CGT on any unrealised gain. For long-term holders, this can be significant.
Strategies to minimise the CGT cost:
1. Identify the lowest-gain parcels to sell: Using specific parcel identification, sell the parcels with the highest cost base (smallest unrealised gain) first. This minimises the CGT in the current year while preserving the lower-cost parcels for future years.
2. Sell in a low-income year: If you have flexibility in timing (e.g. approaching retirement, parental leave year, sabbatical), selling in a year when your other income is lower reduces the marginal rate applied to the capital gain.
3. Offset with available capital losses: If you have capital losses from other investments, use them to offset the gain before the 50% discount is applied.
4. Consider whether rebalancing is worth it: A 5% drift in allocation rarely justifies triggering a significant CGT event. The tax cost of rebalancing must be weighed against the investment benefit. For many investors, tolerating a 10–15% drift and correcting through contributions is preferable to selling.
Practical Rebalancing Schedule
Annual (recommended for most investors):
- Check allocation each July
- Direct next 12 months of contributions to underweight ETF(s)
- Only sell if drift is extreme and contributions cannot correct it
Threshold-based (alternative approach):
- Set a 10% drift threshold
- Check quarterly
- Only act when an ETF drifts more than 10% from target
Frequently Asked Questions
How often should I rebalance my ETF portfolio?
Once per year is sufficient for most investors. Quarterly checks with a 10% drift threshold before acting is an alternative. Do not rebalance more frequently than necessary — each sale potentially triggers CGT and brokerage costs.
How do I rebalance without paying CGT?
Direct new contributions to the underweight ETF rather than selling the overweight one. This corrects the allocation over time without triggering any CGT event. Only sell if the drift is extreme and contributions cannot correct it in a reasonable timeframe (6–12 months).
Do I need to rebalance DHHF or VDHG?
No. All-in-one ETFs like DHHF and VDHG rebalance internally — the fund manager maintains the target allocation automatically. One-ETF investors have no rebalancing responsibility.
General information only. Not financial advice.
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Written by
Mahi PatilSoftware engineer & personal finance enthusiast · Melbourne, Australia
Built Dolaro.com.au to create accurate, free Australian finance tools. Invests in Australian and global ETFs and writes about the topics researched firsthand. More about Mahi →