For as much good as the ETF industry has done in offering hundreds of ultra-cheap investment products targeting almost every market, sector, and theme, they’re not perfect. We often hear the phrase “set it and forget it” when it comes to investing. I’ve used it several times myself. While that theory works at a high level, it overlooks some of the problems that can still emerge from it.
If you follow a few important portfolio construction principles and revisit the composition of it periodically, you’re setting yourself up for long-term success. But ignore these hazards, and your portfolio could begin turning into something you don’t want.
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Tech ETFs, including the Invesco QQQ ETF (NASDAQ: QQQ), have been elite performers over the past decade. But the big rally from the “Magnificent Seven” stocks has turned the fund into a highly concentrated, top-heavy portfolio that now carries extra risk.
The Magnificent Seven stocks plus Broadcom currently account for 44% of the index. As we saw from 2023-2025, investors didn’t mind much because this group was carrying the market higher. But as of March 30, Apple, Microsoft, Nvidia, Meta Platforms, Alphabet, Amazon, and Tesla were all trading at least 13% below their all-time highs. Suddenly, they were becoming a drag on the index.
Whenever a fund is heavily dependent on just a few stocks (or a portfolio is dependent on just a few stocks or funds), there’s an increased risk of lower lows. More true diversification might be the better choice.
This is the classic misjudgment that more funds equal more diversification. It can if you’re combining ETFs that target completely different market segments. But if you’re just buying the funds with the best returns over the past year, for example, there’s probably a lot of overlap.
Consider someone who owns the Vanguard S&P 500 ETF (NYSEMKT: VOO), the Vanguard Total Stock Market ETF (NYSEMKT: VTI) and QQQ. Here’s how that combination can go wrong.
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VOO and VTI have 87% overlap. VTI owns the S&P 500 plus about 3,000 other smaller company stocks in minimal allocations. Performance will be very similar over time.
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VOO and QQQ have a lot of the same top 10 holdings, including all of the big tech/consumer stocks already mentioned. The S&P 500 has them in smaller weights, but the high-tech exposure is still there.
