Different Ticker, Similar Holdings

How ETF Overlap can create false diversification, and how to avoid it.

The Exchange Traded Fund (ETF) revolutionized the investment industry when they were first launched in the 1990s. Currently, the United States alone has thousands of ETFs, yet people stick to the basics. There is good reason for this, as most retail investor’s fail when trying to beat the market. Though, there is a common mistake we see most investors make: they are buying different tickers with very similar if not identical holdings. Let’s take a look at some of the most bought ETFs:

• $SPY – Tracks the S&P 500 (large-cap U.S. stocks)

• $VOO – Also tracks the S&P 500 (same as $SPY, lower fees)

• $QQQ – Tracks the Nasdaq-100 (tech-heavy large caps)

• $VTI – Tracks the total U.S. stock market

• $IVV – Another S&P 500 ETF, similar to $VOO and SPY

• $ARKK – Actively managed, focuses on "disruptive innovation" stocks

• $SCHD – Focuses on high-quality dividend-paying U.S. stocks

• $VWO – Tracks emerging markets (China, India, Brazil, etc.)
  

  While these ETFs are solid investments, many share the same top blue-chip holdings. Exposure to these companies is great, but we reccommend to pick one of these broad market ETFs, and pair it with the likes of an ETF that tracks the Dow Jones, for broader U.S. Index exposure. After you have those funds, we recommend diversifying even further with ETFs focused on different sectors or international markets.” to diversify one’s ETF portfolio.

  Here are some possible options:

• $VEA – Developed international markets (Europe, Japan, Australia)

• $TAN – Solar energy

• $IBIT (BlackRock iShares Bitcoin Trust) – Direct exposure to Bitcoin

• $BLOK – Blockchain-focused companies (not direct coin exposure)

All in all, we like to hold an overall market ETF and from there pick individual stocks that are not majority holdings of those ETFS, and potentially use other ETFS like MSCI(Turkey ETF discussed in previous post) to diversify.