Fund Overlap

Fund Overlap
A situation resulting from owning several mutual funds or exchange-traded funds (ETFs) that hold positions in some of the same securities. Fund overlap reduces the benefits of diversification for the investor.

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

It can be very difficult for a retail investor to keep up fund holdings, but a quarterly or annual check can help investors to understand the strategy of each individual fund, and provide an opportunity to compare top holdings from one fund to another.

If, for example, two separate mutual funds both have overweighted the same stock, it might be worth replacing one of the funds with a similar fund that doesn't carry that stock as a top holding. If a specific sector is overweighted in two funds (such as an overweight position in technology relative to the S&P 500), the investor will need to weigh the benefits and risks of this increased exposure.


Investment dictionary. . 2012.

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