How many equities does an ETF hold — and are you actually diversified?

Imagine investing in an ETF holding 1,000 different equities.

That sounds like broad diversification. But what if almost half the fund's value is concentrated in just a few companies?

At a glance: Diversification in an ETF depends on more than the number of equities. It also depends on how investments are spread across companies, countries, sectors and shared risk factors. An ETF holding many equities can still be concentrated in particular markets.

What does diversification mean?

Diversification means spreading investments across multiple assets.

The aim is to reduce dependence on individual investments.

If you own just one share, its performance depends directly on that company.

If you own many different equities, each company typically has less influence on the overall result.

Diversification can reduce company-specific risk, but does not remove the risk of broad market falls.

How many equities does an ETF hold?

It depends on the fund's investment strategy.

Some ETFs hold a few dozen equities. Others hold hundreds or thousands.

An ETF tracking a broad global equity index will typically cover more countries and companies than an ETF tracking a narrow sector index.

However, the number of companies in an index and the number of securities in the ETF's actual portfolio are different things.

For example, some index-tracking ETFs use sampling, meaning the fund does not necessarily own every security in the index.

Are 1,000 equities more diversified than 100?

Not necessarily.

Imagine two hypothetical ETFs:

ETF A holds more companies, but its largest positions account for a greater share of the fund's value.

ETF B holds fewer companies but, in this example, has a more even allocation.

This does not automatically mean ETF B has lower overall risk. It shows why the number of equities should not be considered in isolation.

What is concentration risk?

Concentration risk arises when a large share of an investment depends on a few companies, sectors or markets.

Imagine an ETF in which five companies together account for 40% of the fund's value.

If those companies fall substantially in value, the effect on the fund's overall return can be significant.

This applies even if the ETF holds many other companies.

Concentration can change over time as companies' market values change.

What does geographic diversification mean?

An ETF may invest in many different companies while still having most of its value in a single country.

Global equity indices are often weighted by market capitalisation. Large markets such as the US can therefore carry substantial weight.

An ETF can be global without being evenly spread across the world's countries.

When examining geographic diversification, you can look at:

• The share in the largest country.

• The allocation between developed and emerging markets.

• The number of countries.

• Concentration in individual regions.

Read also: World ETF vs All-World ETF: what is the difference?.

What does sector diversification mean?

Sectors include technology, healthcare, financials, industrials and energy.

Companies in different sectors can respond differently to economic events.

An ETF investing across sectors can therefore have a different risk profile from one focused on a single sector.

However, sectors are not independent of one another.

During broad market declines, companies in many sectors can fall at the same time.

Can one ETF be sufficiently diversified?

A single broad ETF can provide exposure to many companies and markets.

This does not necessarily mean your whole investment portfolio is diversified across asset classes.

A global equity ETF primarily provides equity exposure, for example. It does not automatically replace exposure to bonds or other asset classes.

Distinguish between diversification within a fund and diversification across the overall portfolio.

Can several ETFs hold the same equities?

Yes.

Imagine owning a global equity ETF, a US equity ETF and a technology ETF.

They may all hold some of the same large US companies.

Even though you own three ETFs, some of your investment may be concentrated in the same companies.

This is called overlap.

The number of ETFs does not necessarily tell you how differently your money is invested.

How do you assess diversification?

Examining several characteristics gives a more nuanced picture:

• The number of holdings.

• The share in the largest positions.

• The country allocation.

• The sector allocation.

• Any overlap with other investments.

These details can describe the fund's diversification.

On their own, however, they cannot determine its overall risk.

Compare diversification with your own criteria

In Wizer Invest, diversification is one of the characteristics that can be included in a criteria-based comparison.

For example, you can choose a maximum exposure to one country and check whether the ETF's documented country allocation meets that limit.

The result describes the relationship between your criterion and the ETF's characteristics, rather than establishing whether the investment is generally safe or risky.

Frequently asked questions

How many equities should an ETF hold?

No particular number guarantees good diversification. Diversification also depends on the equities' weights and shared risk factors.

Is an ETF with 500 equities safer than one with 50?

Not necessarily. The number of equities is only one part of the assessment.

Can a global ETF be concentrated?

Yes. A global ETF can have substantial exposure to individual countries, sectors or companies.

What is the difference between diversification and risk?

Diversification describes how investments are allocated. Risk describes uncertainty about their performance and possible losses.

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This article provides general information, rather than personal investment advice.