Before you pity Mark Zuckerberg for losing more than $40 billion this year on his Meta Platforms stock — look at your own portfolio. You likely took a hit on this and other falling S&P 500 stocks — even if you think you're diversified with ETFs.
Meta Platforms, formerly known as Facebook, holds a commanding 10% weight in nearly 20 ETFs, Morningstar Direct says. And that's just one example of ETFs tying their fortunes to just a few stocks.
All told, nearly 400 ETFs, or roughly a quarter of the trackable and relevant universe, put half or more of their portfolios in just 10 positions, according to data from Morningstar Direct. And such heavy bets cause uncomfortable positions when these highly owned stocks plummet.
"Investors think about ETFs providing diversification benefits compared to owning individual stocks, but many ETFs are concentrated in a handful of holdings, which provides upside potential but also downside risks," said Todd Rosenbluth, ETF and mutual fund strategist at CFRA. "When you put too many eggs in your basket you are likely to drop some."
Doubling Down On S&P 500 Debacle: Meta Platforms
Big bets on Meta stock are hurting big-time now. The stock lost a third of its value this year. And that means ETF investors are holding the bag on a sizeable piece of the $317 billion in market value that's vanished from the S&P 500 stock this year.
Meta's shares dropped so much the company is no longer the seventh most-valuable company in the S&P 500. It slipped to eighth behind Nvidia. Meta now has a market value of roughly $600 billion.
Unfortunately, even the most-popular index of big-cap diversification, the S&P 500, held roughly 2% in Meta going into the year. That stake is down to 1.4%. But other ETFs were even more loaded up on Meta. Coming into 2022, the Invesco QQQ owned more than double the S&P 500's weight in Meta at 4.8%. That's down to 1.4% now.
And a number of communications services ETFs loaded up even more, still. Fidelity MSCI Communication Services put nearly 15% into the single stock as of early February. "Meta is such a huge company that a lot of cap-weighted U.S. equity ETFs have in their top holdings," said Lara Crigger, managing editor of ETFTrends.com. It's a top 15 holding in 171 ETFs.
Luckily, that's on the high side among other disappointing stocks. Peloton, which is down 70% in the past year, finds its largest position of 4.3% in the Roundhill MEME ETF, Morningstar says. And another fallen S&P 500 giant, PayPal, finds its largest stake in the Grayscale Future of Finance at nearly 7%.
"If you own an ETF with 10% stake in Meta you need to both be confident in its prospects plus also make sure that a concentrated ETF is not dominating your broader portfolio," Rosenbluth said.
S&P 500 Sectors Grow Concentrated
Some of those ETFs' concentration reflects the winners-take-most nature of many S&P 500 sectors. Dominant market cap players in sectors can quickly overtake entire sectors. And sectors are popular themes for many ETFs.
Nearly half of the 11 S&P 500 sectors, including communications services, energy, consumer discretionary, information technology and consumer staples put more than half their portfolios in just five stocks, says data from S&P Dow Jones Indices. Communication Services is the most top heavy: More than 70% of its value is held in five stocks. And that's followed by the energy sector's 63% weight in the same number.
S&P 500 Sectors Get Top-Heavy
| Sector | Weight of top five holdings |
|---|---|
| Communication services | 73.0% |
| Energy | 63.3 |
| Consumer discretionary | 62.1 |
| Information technology | 58.3 |
| Consumer staples | 55.1 |
| Utilities | 44.1 |
| Materials | 42.0 |
| Real estate | 41.3 |
| Financials | 39.6 |
| Health care | 33.4 |
| Industrials | 23.1 |
Source: S&P Dow Jones Indices
Know What You Own With ETFs
The importance of understanding what's inside your ETF is a common refrain. And that's especially important during periods of S&P 500 volatility.
Just know, though, some ETFs do use techniques to boost diversification even if they hold few stocks. Some ETFs use options to reduce one-company risk. Yet others own other more diversified ETFs, Rosenbluth says. For instance, First Trust Dorsey Wright Focus 5 has nearly all of its holdings in its top 10 investments, Morningstar Direct says. But those include a variety of underlying ETFs that own energy stocks and Nasdaq stocks.
"But country focused and industry focused ETFs are concentrated for the less appealing reasons," he said. And if that's an issue, you might think about ETFs that weight all holdings equally, rather than by market value, Crigger says.
"If you're looking to reduce that risk, an equal weight strategy ... would allow you to stay invested in a top-heavy market while reducing exposure to the largest names," she said.
The Biggest Highly Concentrated ETFs
The largest ETFs with 80% or more of assets in their top 10 holdings
| Name | Ticker | % of assets in top 10 holdings | Total assets ($ millions) |
|---|---|---|---|
| Alerian MLP | 83.1% | $6,291 | |
| First Trust Dorsey Wright Focus 5 | 99.9 | $2,778 | |
| Main Sector Rotation | 80.5 | $1,044 | |
| Global X Russell 2000 Covered Call | 98.8 | $960 | |
| Day Hagan/Ned Davis Rsrch Smrt Sect | 97.3 | $404 | |
| iShares US Pharmaceuticals | 80.6 | $388 | |
| InfraCap MLP | 100 | $314 | |
| Overlay Shares Large Cap Equity | 98.6 | $262 | |
| First Trust Dorsey Wright Intl Foc 5 | 99.8 | $218 | |
| ALPS Equal Sector Weight | 91.3 | $217 |
