Money and Me: ETF overlap - are your ETFs giving you the diversification and income you expect? 

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Best of Live Well ft. Lance Alexander.

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Lance Alexander (0:19)

Well, time for Money And Me, and we want to talk about ETFs. Are your ETFs giving you the diversification and income you expect? You might own several exchange-traded funds or ETFs, but how much of your money is going into the same companies? Different funds can have overlapping holdings, and that may leave you more exposed to certain stocks than you realize, and then there's income. If an ETF offers regular payouts, how do you judge whether it's delivering a good overall return?

An ETF or an exchange-traded fund is a single investment that holds many different stocks and bonds inside it. So let's talk about ETFs, and what you need to check in the funds you own, and are the ETFs doing the job you bought them to do with us? It's Tim Phillips, founder of TimTalksMoney. Tim, welcome to the show. Welcome to Money And Me.

Tim Phillips (1:18)

Hey, Lance. Thanks for having me on. Good to be on the show today.

Lance Alexander (1:21)

Beautiful. You've had a good weekend, my friend?

Tim Phillips (1:23)

I have. Have you?

Lance Alexander (1:24)

Yes, I have as well. I even went for a run, so I'm happy, because the hay sort of went into the moderate range. Yeah, it receded, right? Yeah, and I hit it up to Mount Favre, ran there, was good, some nice fresh air.

That's another day to talk about fitness, but now let's talk about money. How common is it for different ETFs to hold the same companies? It could be a good thing, but when should investors then be concerned?

Tim Phillips (1:53)

Yeah, well, it is very common for ETFs to hold the same company. We're talking about some of the largest ETFs in the world. It's ETFs everyone's familiar with. So an S&P 500 ETF, the NASDAQ 100 ETF, MSCI, all countries world index ETF. These kinds of ETFs have pretty much all the same companies or a lot of the overlapping companies. There will be different ones, obviously, but you're going to see Apple, you're going to see Microsoft, you're going to see Google, Meta, Tesla, Netflix, all the big tech names. And so this is a common complaint, I think, a more common refrain from maybe going into ETFs is, okay, I'm going to be so concentrated in these big cap, large cap, mega cap, rather tech companies from the US., that they're found all over ETFs, all the common ETFs that you know. So, for example, S&P 500, NASDAQ 100, there's a lot of overlap there because you've got basically 100 of the biggest tech companies in NASDAQ overlapping with S&P 500, which is 30, 35% tech. And if you take into account communications in these other sectors, it can be close to 40% is actually really tech companies. So it is very common, but because these are market cap weighted, which means they give more attribution, there's more weight to how big the company is in terms of the value, you're always going to be a bit more exposed to those types of companies within an ETF, especially one that tracks a developed market, developed markets even globally. So obviously S&P 500, NASDAQ 100, that's 100% US.

But if you do MSCI World or MSCI All Country World, which is just the whole world, including emerging markets, the US already makes up 63 to 70% depending on, you know, developed markets or developed plus emerging. So I think for most ETFs or a lot of the ones that most of us invest into, we're going to have a lot of exposure to these large cap tech names.

Lance Alexander (3:45)

So speaking about exposure as well, if you've got top tech stocks in the S&P 500, as well as the NASDAQ 100, is that okay or are you being overexposed?

Tim Phillips (3:57)

I think if you, this is something I've always said as well, is if you're investing S&P 500, there's really no point holding NASDAQ 100 as well because you're pretty much overlapping and you're just overweighting all these tech names again, being concentrated. So, and same with an all countries world index, you're already quite exposed to tech. There's not a lot of portfolio, I'd say logic, to buying the S&P 500 as well or buying the NASDAQ 100 as well. You can't overweight if you're being intentional about it and you really want to go overweight tech, then that can work. But for most people, if you're thinking you're already exposed enough to these tech names, then you really need to look at your portfolio as a whole, understand what percent is actually exposed to these mega cap tech names in the US. And if you're comfortable with that level, that's fine. But I think a lot of times a lot of people just construct their portfolio because this is a popular ETF, this is a popular ETF, I should have that and you know, they have three or four ETFs and you think you're diversified, but actually looking at the underlying, you're quite concentrated in tech even with three or four ETFs in your portfolio.