3Investing in ETFs can increase risk through overlapping holdings
Even when investing across multiple ETFs, repeated holdings of the same stocks can concentrate portfolio risk in one place. Before investing, you should directly check each ETF's holdings and management fees.
Even when investing across multiple ETFs, repeatedly holding the same stocks in practice can concentrate risk in one place. This matters to investors because losses may occur simultaneously even when the portfolio appears diversified.
ETFs that track the same index or similar strategies commonly have overlapping top holdings. In this case, price movements in individual ETFs can translate into volatility across the entire portfolio.
Overlapping holdings can increase fluctuations in returns. Management fees and trading costs may overlap, potentially increasing total costs.
Operating multiple ETFs can make a portfolio unnecessarily complex. Comparing each ETF’s holdings and management fees makes it easier to manage.
The article recommends checking directly whether holdings overlap before buying ETFs. Reviewing the holdings makes it possible to determine the total weighting of the same securities.
Specifically, it advises comparing each ETF’s top holdings, tracking index, and management fees. It says this process is necessary to determine whether the diversification is genuine.
Sources: The Motley Fool
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