ETF Overlap
When multiple ETFs or funds in your portfolio hold the same stocks, creating unintended concentration risk.
What You Need to Know
ETF overlap occurs when you own multiple index funds or ETFs that hold many of the same stocks, defeating the purpose of diversification. This is common because many funds track similar indices.
Example of Overlap:
- Fund A: S&P 500 Index (VOO)
- holds Apple, Microsoft, Amazon
- Fund B: Total Stock Market (VTI) - 80% overlap with S&P 500
- Fund C: Tech ETF (VGT) - 40% Apple, Microsoft, Nvidia
If you own all three, you're overweighted in big tech stocks. When tech crashes, your "diversified" portfolio crashes together.
Common Overlap Scenarios:
- S&P 500 + Total Market Funds: 80% overlap (redundant)
- Growth + Large-Cap Funds: Often 60-70% overlap
- Sector ETFs + Broad Index: Double exposure to certain stocks
How to Check: Use an ETF overlap tool to compare holdings. Input ticker symbols (e.g., VOO, VTI, QQQ) and see:
- Which stocks appear in multiple funds
- What percentage of holdings overlap
- Where you're overconcentrated
Solution:
- Replace overlapping funds with truly complementary ones
- Use international funds (VXUS) for real diversification
- Consider bond funds (BND) for asset class diversification
- Simplify: Often one total market fund is enough
Goal: True diversification means when one sector crashes, others cushion the blow. Overlap destroys this protection.
Sources & References
This information is sourced from authoritative government and academic institutions:
- sec.gov
https://www.sec.gov/files/ib_etfs.pdf
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.