ETFs With The Most Single Stock Risk

These funds are at the mercy of concentrated holdings.

Diversification is a cornerstone of what makes an ETF a useful part of any portfolio. Depending on the product, an investor can get exposure to the ups and downs of thousands of securities with a single market order.

Take the Vanguard Total World Stock ETF (VT), which was the most diversified product in the U.S.-listed market when ETF.com analyzed fund concentration five years ago. It’s only gotten more diverse since then, growing from 7,495 holdings in July 2016 to 9,122 today.

At the same time, many ETFs exist that place significant weight into just one or two stocks and smaller weightings in other securities to produce a slight level of diversification.

Following is the current state of ETFs with significant single-stock and concentration risk.

Concentrated Holdings … Or So It Seems

It may seem odd that the number of ETFs with 20 or fewer holdings has grown to 188 as of mid-August, as one of the key arguments for using an ETF is diversified exposure.

That rise in concentrated funds is due to the rollout of “buffer” ETFs started by Innovator back in the summer of 2018. These funds cap the return upside of popular indexes like the S&P 500 or the Russell 2000 in exchange for protecting against corrections, and generally hold just three or four options contracts to achieve their goal.

Several other ETFs with a small number of holdings are funds of funds, or ETFs that hold clusters of other products in the same wrapper. This in theory allows the prime ETF to give its shareholders exposure to multiple themes or industries at once, albeit in a diluted manner.

With those caveats in mind, these are some of the ETFs with exposure to single-stock risk, either because they carry a large weighting in one stock, or they don’t have the rest of their weightings spread out to counter that concentration risk. We’ve placed a cap on our analysis to ETFs with fewer than 30 holdings.

Simplify’s Hyperconcentrated Theme Quartet

Simplify Asset Management is the clearest proponent of highly concentrated ETFs, with its “Volt” lineup of four hyperconcentrated thematic ETFs that launched at the end of 2020.

The Simplify Volt RoboCar Disruption and Tech ETF (VCAR), the Simplify Volt Cloud and Cybersecurity Disruption ETF (VCLO), the Simplify Volt Pop Culture Disruption ETF (VPOP) and the Simplify Volt Fintech Disruption ETF (VFIN) all carry at least 30% of their weightings toward the Invesco QQQ Trust (QQQ), and devote 15-30% into one or two stocks associated with that theme.

For example, VCAR just holds QQQ, the Invesco NASDAQ Next Gen 100 ETF (QQQJ), Tesla stock, a basket of options and cash in its attempt to capture the autonomous and electric vehicle theme. VPOP has more than two-thirds of its assets in just three holdings: QQQ and stock in Snapchat parent company Snap and Spotify.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

So far, investors have not been kind to this quartet of ETFs. They have a combined $12 million in assets and average spreads above 1%, due in part to all of them costing more than 1% in fees.

However, the Volt funds are outliers due to their small amount of assets. The rest of the ETFs on this list have at least $100 million in assets under management and are more likely to be held by a wide range of investors.

Communication Services Select Sector SPDR Fund (XLC)

This $15.5 billion ETF holds nearly half of its assets in just two companies. Nearly 23% of its assets are in Facebook, while a combined 25.28% is held in Class A and Class C stock of Alphabet, parent company of Google.

VanEck Vectors Oil Services ETF (OIH)

Houston-based Schlumberger is the main holding in this fund, with a 20.73% weighting, followed by a 13.53% weighting in Halliburton.

iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI)

Morgan Stanley and Goldman Sachs dominate this ETF of financial firms, for a combined 42% of its assets. The next largest holding is Cboe, with a comparatively low 4.86% weighting.

Pacer Benchmark Industrial Real Estate SCTR ETF (INDS)

This fund tracks a select index tracking publicly traded REITs and companies that operate factories, warehouses and similar industrial assets. Just over a third of this ETF is concentrated in Prologis and Duke Realty stocks, with about 15% of the funding’s holdings dedicated to both.

Utilities Select Sector SPDR Fund (XLU)

Finally, this $13.7 billion fund, a benchmark for utility providers in the S&P 500, is strongly tilted toward NextEra Energy. That electricity generator holds 17.16% of the fund’s assets, with Duke Energy a distant second, with an 8.43% weighting.

Contact Dan Mika at [email protected], and follow him on Twitter