Fund Overlap

What Is Fund Overlap?

Fund overlap is a situation where an investor claims shares in several mutual funds or exchange traded funds (ETFs) with overlapping positions. For example, in the event that an investor possesses both a S&P 500 index mutual fund and a technology sector ETF, they would cover a lot with the FAANG stocks (i.e., Meta (formerly Facebook), Apple, Amazon, Netflix, and Google), since those stocks are large parts of the two funds' portfolios. This could make too much concentration in just a couple of organizations' shares.

Fund overlap reduces the benefits of diversification for the investor and may make concealed risks.

Understanding Fund Overlap

While small amounts of overlap are to be expected, extreme cases of fund overlap can open an investor to unexpectedly high levels of company or sector risk, which can distort portfolio returns when compared with an important benchmark.

It tends to be extremely challenging for a retail investor to keep track of individual fund holdings, however a quarterly or annual check can assist investors with grasping the strategy of every individual fund and give an opportunity to compare top holdings from one fund with another.

If, for instance, two separate mutual funds both have overweighted a similar stock, it very well may be worth supplanting one of the funds with a comparative fund that doesn't carry that stock as a top holding. On the off chance that a specific sector is overweighted in two funds (like an overweight position in technology relative to the S&P 500), the investor should gauge the benefits and risks of this increased exposure.

Overweighting Sectors

Overweight is a situation where an investment portfolio holds an excess amount of a specific security when compared to the security's weight in the underlying benchmark portfolio.

Actively managed portfolios will make a security overweight while doing so allows the portfolio to accomplish excess returns. Overweight can likewise allude to an investment investigator's perspective that the security will outperform its industry, its sector, or the whole market.

Securities will as a rule be overweight when a portfolio manager accepts that the security will outperform different securities in the portfolio. An instance of having a security being overweight in an investment portfolio would be the point at which a portfolio typically holds a security at a weight of 15%, however the security's weight is brought to 25% up in an endeavor to increase the return of the portfolio. One more justification behind overweighting a security in a portfolio is to hedge or reduce the risk from another overweight position.

The alternative weighting proposals are equivalent weight or underweight. Equivalent weight suggests that the security is expected to perform in accordance with the index, while underweight suggests that the security is expected to lag the index being referred to.

Fund Overlap and Diversification

Fund managers and investors frequently enhance their investments across asset classes and determine which rates of the portfolio to designate to each. These can incorporate stocks and bonds, real estate, ETFs, commodities, short-term investments, and alternative asset classes. They will then, at that point, broaden among investments inside the asset classes, for example, by choosing stocks from different sectors that will quite often have low return correlation, or by picking stocks with various market capitalizations.

On account of bonds, investors select from investment-grade corporate bonds, U.S. Treasuries, state and municipal bonds, high-yield bonds, and other fixed income securities.

Highlights

Overlap can be reduced by first distinguishing which securities a fund holds before choosing to purchase its shares.
Fund overlap happens when an investor holds numerous mutual funds or ETFs that each puts resources into the equivalent or comparative securities.
Fund overlap can reduce portfolio diversification and make concentrated positions, frequently with the investor largely unaware.