Building a portfolio
Fund overlap
Also called ETF overlap or Holdings overlap
How much of the same underlying companies two or more funds hold, so that owning both diversifies less than it appears to.
How it works
Most broad funds weight their holdings by market value, so the largest companies sit at the top of each one. A total-market fund, a large-cap index fund and a technology fund can therefore share the same handful of names at the top, in similar proportions.
The count that matters is exposure, not funds. Add up what each fund holds in a single company, weighted by how much of your portfolio sits in that fund, and the result is what actually moves when that company moves — whatever the number of lines on your statement says.
Where it misleads people
Three funds can be one bet. Counting funds feels like counting diversification, and it is not: the overlap is largest exactly where the market has run hardest, so a portfolio looks most spread out at the moment it is most concentrated.
Worked example
You split your money evenly across three funds. One holds 7% in a single company, the second 6%, the third 20%. Your real exposure to it is (7 + 6 + 20) ÷ 3 = 11% of everything you own — a company you never chose directly, and more than a tenth of the portfolio.
Related terms
- DiversificationSpreading money across things that do not move together, so no single failure can decide your outcome.
- Concentration riskThe risk that too much of your outcome depends on one holding, sector, country or currency.
- ETFA fund whose shares trade on an exchange throughout the day like an ordinary share.
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
- Market capitalisationWhat the market says a whole company is worth: the share price multiplied by the number of shares.
More in Building a portfolio
- Glide path
- Efficient frontier
- Home bias
- Effective number of holdings
- Investment policy statement
- Drift
- Modern portfolio theory
- Covariance
All 20 Building a portfolio terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.