Key Points
Like many investors, I’m a huge fan of exchange-traded funds (ETFs), particularly because they combine the best features of stocks and mutual funds. When I invest in a particular company, I own only its stock. When I invest in an ETF, I own a diversified portfolio of stocks from many companies. Buying an ETF is like buying a whole basket of high-performing investments, thereby diversifying my portfolio.
However, there’s an inherent danger in believing that you’re diversifying your portfolio simply by putting your money in ETFs.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
When diversified isn’t diversified
Investing in multiple ETFs can create an illusion of diversification while leaving you with greater risk, unnecessary costs, and a portfolio that may be more complex but is not safer.
Here’s why: The most popular ETFs may have different names, but that doesn’t mean they have different holdings. In fact, you could purchase two or three different ETFs and barely get any diversification because each one holds overlapping stocks.
How overlapping happens
There are a few reasons different ETFs end up with the same underlying holdings:
- It’s common for stock ETFs to track broad indexes listing the same companies at the top. For example, large U.S. technology companies often dominate multiple indexes.
- Along the same lines, sector or thematic ETFs, such as those focused on tech, healthcare, or innovation, often hold many of the same high-profile growth stocks.
- Even different types of stock funds with different labels can end up owning many of the same big, popular companies.
The key danger of overlapping
Let’s say you’re committed to diversifying your portfolio and decide the best way to do so is to buy the Vanguard S&P 500 ETF (NYSEMKT: VOO) and iShares Core S&P 500 ETF (NYSEMKT: IVV). You feel pretty good about it: The former holds 505 stocks, and the latter holds 504 (as of June 11).
There’s a problem, though. Both ETFs track the S&P 500, and because they’re tracking the same index, their top holdings — including Nvidia, Apple, and Microsoft are identical.
Because ETF baskets and portfolios carry the same market and category risks as their underlying securities, overlapping holdings concentrate risk rather than spreading it.
How to protect yourself from overlapping
List each ETF you already own or plan to buy. You’re going to want to look under the hood of each onr.
Next, check the top holdings of each ETF. In the example above, both ETFs follow the S&P 500 index. However, it’s possible to overlap with ETFs that seem quite different. For example, an ETF following the S&P 500 index may list the same top holdings as a technology ETF.
Make it easy on yourself by using a tool. The ETF Research Center provides a fund overlap tool that lets you enter two ETFs and instantly see the percentage of holdings and weight they share. Your instinct to diversify your holdings is a wise one. However, to do it right, you’ll want to ensure your investments don’t overlap.
Should you buy stock in Vanguard S&P 500 ETF right now?
Before you buy stock in Vanguard S&P 500 ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard S&P 500 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $433,268!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,259,391!*
Now, it’s worth noting Stock Advisor’s total average return is 935% — a market-crushing outperformance compared to 206% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
See the 10 stocks »
*Stock Advisor returns as of June 13, 2026.
Dana George has positions in Apple. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
