Avoiding excessive fund overlap is key to managing risk in your investment portfolio

You should review the holdings in the funds you own at least once a year.

Fund overlap happens when an investor owns multiple mutual funds or ETFs that share the same holdings.
This can result in your portfolio being less diversified, amplifying the risk of losses in a down market.
To prevent excessive fund overlap it is important to review your portfolio regularly.

Diversification is one of the most important principles of investing. By allocating your assets in a wide range of securities within and across different asset classes, you reduce your exposure to risk and volatility.

One way investors achieve diversification is by holding a variety of mutual funds and exchange traded funds (ETFs). However, if you choose this route, it’s important to make sure that fund overlap isn’t undermining your effort to create a diversified portfolio.

What is fund overlap? 

Fund overlap occurs when an investor owns multiple mutual funds, ETFs, and sometimes individual stocks, with overlapping positions.

An example of this would be owning the popular Invesco QQQ ETF, which tracks the Nasdaq 100 Index, and the Vanguard Total Stock Market Index Fund (VTI). Both have significant positions in many of the same companies. For instance, as of mid-2022, each had Apple, Microsoft, Amazon, Alphabet, Tesla, and Meta in their Top 10 holdings.

“One of the biggest dangers of extreme overlap is the possibility of having heavily concentrated positions,” says Joshua Lutkemuller, a chartered financial analyst (CFA) and head of investment strategy at Strongside Asset Management. “An investor might unknowingly create a portfolio that is heavily concentrated in weight to just a few names, even though they might have the illusion of diversification because they own several funds.”

What causes fund overlap? 

Every fund you invest in has an investment strategy and goals that are described in its

Source:: Businessinsider

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