The Danger of Diversifying Without Really Diversifying

1 hour ago 6

Dana George, The Motley Fool

Sat, June 13, 2026 astatine 1:43 PM CDT 4 min read

Like galore investors, I'm a immense instrumentality of exchange-traded funds (ETFs), peculiarly due to the fact that they harvester the champion features of stocks and communal funds. When I put successful a peculiar company, I ain lone its stock. When I put successful an ETF, I ain a diversified portfolio of stocks from galore companies. Buying an ETF is similar buying a full handbasket of high-performing investments, thereby diversifying my portfolio.

However, there's an inherent information successful believing that you're diversifying your portfolio simply by putting your wealth successful ETFs.

Missed Nvidia successful 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" awesome flashed for a little-known chipmaker called Nvidia. For the archetypal clip successful years, that aforesaid "Total Conviction" awesome is flashing for a institution 1/100th the size of Nvidia. Continue »

Three tiny woody blocks sitting connected a laptop keyboard, with the letters E, T, and F printed connected them.

When diversified isn't diversified

Investing successful aggregate ETFs tin make an illusion of diversification portion leaving you with greater risk, unnecessary costs, and a portfolio that whitethorn beryllium much analyzable but is not safer.

Here's why: The astir fashionable ETFs whitethorn person antithetic names, but that doesn't mean they person antithetic holdings. In fact, you could acquisition 2 oregon 3 antithetic ETFs and hardly get immoderate diversification due to the fact that each 1 holds overlapping stocks.

How overlapping happens

There are a fewer reasons antithetic ETFs extremity up with the aforesaid underlying holdings:

It's communal for banal ETFs to way wide indexes listing the aforesaid companies astatine the top. For example, ample U.S. exertion companies often predominate aggregate indexes.
Along the aforesaid lines, assemblage oregon thematic ETFs, specified arsenic those focused connected tech, healthcare, oregon innovation, often clasp galore of the aforesaid high-profile maturation stocks.
Even antithetic types of banal funds with antithetic labels tin extremity up owning galore of the aforesaid big, fashionable companies.

The cardinal information of overlapping

Let's accidental you're committed to diversifying your portfolio and determine the champion mode to bash truthful is to bargain the Vanguard S&P 500 ETF (NYSEMKT: VOO) and iShares Core S&P 500 ETF (NYSEMKT: IVV). You consciousness beauteous bully astir it: The erstwhile holds 505 stocks, and the second holds 504 (as of June 11).

There's a problem, though. Both ETFs way the S&P 500, and due to the fact that they're tracking the aforesaid index, their apical holdings -- including Nvidia, Apple, and Microsoft are identical.

Because ETF baskets and portfolios transportation the aforesaid marketplace and class risks arsenic their underlying securities, overlapping holdings ore hazard alternatively than spreading it.