How to Spot Hidden Overlap in Your Funds and Avoid the Diversification Trap

Owning a growth fund, a value fund, and a small-cap fund might sound like a reasonably diversified approach to US stocks. But those labels don’t tell you everything about what you own.

In a recent subscriber-exclusive Morningstar Investor webinar, fund research analysts Todd Trubey and Dan Sotiroff showed how familiar tickers can re-appear across seemingly different investments. They shared insights into how to identify the overlap and research more diversified opportunities.

The session paired a demonstration of Investor’s tools with subscriber questions about overlap, dividend funds, international investing, and more. Todd and Dan kick off the recording with a step-by-step walkthrough; the Q&A begins around 13:35.

Key takeaways

• Fund names and categories are a starting point, but a value or dividend strategy can still hold the same large companies that dominate a growth fund.
• Sector exposure and stock exposure answer different questions. Two funds can have similar technology weightings but own very different businesses. Conversely, a lower technology weighting doesn’t eliminate exposure to large tech-adjacent companies classified in other sectors.
• A highly rated fund may not fill the gap you need it to fill. Evaluate the investment on its own merits, then ask what it adds alongside your existing holdings.
• The fund data discussed here reflect the real-time webinar demonstration and can change over time.

How to find overlap and compare potential diversifiers

1. Start with the portfolio you already own

Open your portfolio in Investor and select X-Ray. Look at the Style Box and sector weightings together. A balanced spread across investment styles can still conceal heavy concentration in one sector.

Next, open Stock Intersection to see your underlying stock exposure across funds and individual holdings. In Todd’s example, Nvidia accounted for about 8% of the portfolio, while Alphabet and Microsoft each represented about 4%.

Before searching for another fund, define the problem you want to solve. Do you want less technology overall, less exposure to a handful of giant companies, or both? Your answer will shape the best approach.

2. Use Screener to build a manageable shortlist

Go to Tools, open Screener, and set Security Type to include mutual funds and ETFs. Todd demonstrated a search using AI quick filters:

• Enter “low technology weighting,” then review the resulting filter. Todd adjusted the ceiling to less or equal to 16%.
• Add “more than 100 stocks” to seek funds with a broader set of holdings.
• Enter “Medalist Rating Bronze or higher.” To narrow the results further, Todd retained only Silver and Gold.
• Add “no load share class.”

Of course, these were demonstration criteria, not a prescribed allocation or a guarantee of diversification; you’ll want to review each filter and adjust it for your purpose. Todd opened Fidelity Equity Income from the results and checked its technology weighting, which was about 15% in the demonstration. He also noted international funds among the candidates, offering another direction to investigate for his domestic-only sample portfolio.

Dan showed a second approach to using the screener, opting to hand-pick his criteria using the Add Filter feature. His screen combined the Large Value category, Silver or Gold Medalist Ratings, fund size of at least $1 billion, an adjusted expense ratio of 0.40% or less, and turnover of 45% or less.

He then used Data and Columns to add Sector Allocation Technology and sorted by that column. This uncovered an important insight: funds in the same category could have substantially different technology exposure.

3. Compare candidates side by side

Open Compare in a second browser tab so you can move between your screen results and the comparison. Select Add Securities and enter the names or tickers of the funds you want to investigate.

Dan added Capital Group Dividend Value ETF (CGDV), iShares Core Dividend ETF (DIVB), and Dimensional US Large Cap Value ETF (DFLV). In Compare, he expanded Equity Sectors to examine their sector weights. The first two had roughly a third or more of their assets in technology at the time of the demonstration; the Dimensional ETF had considerably less.

That narrowed the universe, but more digging was required.

4. Open each fund and inspect its largest holdings

Click a fund’s name in Compare to open its quote page, then review its largest holdings. Dan’s examples showed why this extra step matters:

• CGDV held several familiar market heavyweights, including Microsoft, Nvidia, Meta, Broadcom, and Alphabet. Despite its Gold rating at the time, it was unlikely to accomplish much for someone specifically trying to reduce exposure to those companies.
• DIVB also had substantial technology exposure, but its holdings included a different group of companies, such as Accenture, IBM, and Cognizant. It could address overlap in particular stocks without doing the same for sector concentration.
• DFLV had less technology exposure, but Amazon, Meta, and Micron still appeared among its largest holdings. A lower sector weighting alone didn’t tell the whole story.

Consider that distinction when comparing a candidate with a fund you already own. Identify what would actually change before deciding to add, replace, or consolidate a holding.

Participant Q&A highlights

How much overlap is too much?

“The reality is there is no right answer,” Dan said. A 2% or 5% limit isn’t universally applicable for every investor. Your investment approach, risk tolerance, and goals matter, as does how much of your portfolio is tied up in its largest holdings.

Todd urged investors to count the exposure they already own through funds before buying a stock separately. “You may be overweighted more than you actually think you are.” And don’t stop at one company: several of your biggest holdings may depend on the same technology trends and move in the same direction when those trends falter.

Are ETFs more diversified than mutual funds?

“An ETF is a wrapper, a mutual fund is a wrapper,” Todd said. Either can hold a broad portfolio or a concentrated one. The fact that both single-stock ETFs and broad-market ETFs exist shows you a label can only tell you so much.

Dan put the research task plainly: “The vehicle doesn’t really determine diversification. It’s the process underneath that you need to pay attention to.” Look at the holdings and how they are selected, including Morningstar’s Process Pillar assessment.

What if several funds are giving me similar exposure?

If you own two or three large-blend funds, some overlap is to be expected. But ask whether you need all of them. Dan suggested considering the one you feel most comfortable owning for the long run when the funds are providing similar exposure.

“I personally like just simplifying things and consolidating things when I can,” he said. This is a preference, but not a rule stating that every overlapping holding needs to go. The useful question is whether each fund earns its place in the portfolio.

Where can I look if I want less exposure to giant technology companies?

Dan pointed to small-cap stocks, particularly small value, as a place to investigate. The biggest companies cannot qualify for those portfolios by size, so investors are getting a different set of businesses. But that doesn’t mean a smoother ride or immediate outperformance.

“That’s the cost of diversification at the end of the day; it’s probably going to be underperforming at some point in time, and you have to stick with it over the long run in order to really get the benefit out of it,” Dan said. He also cautioned that moving into these areas could increase volatility.

When a participant asked how to bet against a possible AI bubble, Todd’s answer was direct: “The last thing you would want to do is short these stocks.” A continued rally could produce substantial losses. His alternative: “You may want to lean away.” He pointed to small caps and international investments as places to look for different exposure, and cash as an option for avoiding the equity exposure itself.

Can dividend or international funds help?

Todd said dividend-oriented funds can offer a different mix from large-growth funds, but you’ll want to take a closer look at the funds’ strategies. Dan highlighted: “Be very careful around dividend growth.” Some popular dividend-growth funds hold Apple and Microsoft among their largest positions. A dividend label doesn’t mean you have escaped the companies you are trying to diversify away from.

The same scrutiny applies overseas. International funds can bring different sector exposures, but companies such as Taiwan Semiconductor and ASML still connect them to the technology and AI story. Dan favored broad ex-US portfolios over narrow selections: “There’s a lot of single countries and single markets that are very, very concentrated in a single industry or a single sector, sometimes even single stocks.”

Should I measure concentration within stocks or across my whole portfolio?

“Well, probably both, I would think,” Dan said. His starting point was the equity allocation: understand the individual stocks you own, then assess how that exposure fits within the full portfolio.

The bond allocation matters, too. Dan distinguished Treasuries from corporate bonds, noting that corporate debt can share some of the risks affecting equities. The question is what role those holdings are supposed to play when stocks struggle.

How often should I check for changes?

“The bigger changes tend to evolve over longer periods of time,” Dan said. But funds don’t stand still. Active managers can change their positioning, and index reconstitutions can move familiar companies between growth and value benchmarks.

The analysts didn’t prescribe a review calendar. Their practical guidance was to stay aware of meaningful shifts and use X-Ray and the fund holdings to see what those shifts mean for you. As Dan reminded participants about the webinar demonstration, “This could change six months from now.”

Do separate accounts or brokerages add diversification?

Asked whether holding the same fund in two portfolios provides diversification, Todd replied, “It’s still you, right?” The account labels don’t change the underlying investment.

He made the same point about separate brokerage firms: “If you own $10,000 of Microsoft in both of those places, you [still] have $20,000 worth of Microsoft.” Holding the shares in two places doesn’t reduce that stock exposure.

That doesn’t make it wrong to use the same fund for different goals. Dan reemphasized a central theme: “What are the objectives of those two portfolios?” Start there, then assess whether each portfolio’s stock-and-bond mix fits its job.

Should a manager change prompt me to sell?

A participant asked whether Fidelity Contrafund’s manager transition was a reason to move on. Todd pushed back on the idea of selling the moment a new manager takes over: “Those new managers are not going to, you know, sell everything and bring in an entire new set of stocks.”

He focused instead on the incoming managers’ abilities, whether they would invest in generally the same way, and how quickly the holdings might change. Portfolio turnover helps put that pace in perspective. Following Morningstar’s analyst coverage can help investors evaluate the transition as it unfolds, rather than treating the announcement as an automatic signal to consider selling.

Can a simple portfolio still work?

When a participant asked why not just own a total stock market fund, Dan responded, “That’s a great answer. I don’t really have a rebuttal against that.” His point was that a long-term investor in a broad market fund accepts periods of concentration, drawdowns, and changing market leadership as part of the experience.

Asked about being overdiversified, Dan didn’t offer a maximum number of holdings. He focused on owning investments with meaningfully different exposures that will come in and out of favor at different times.

Todd also spoke about target-date funds, which are designed to combine asset classes in a single holding. His wife owns one in her retirement account; his own portfolio is more complicated. “Am I sometimes envious of my wife’s portfolio where she has this one thing? Yes.”

Put the discussion into practice

Start with one question: What exposure am I trying to change? Use X-Ray and Stock Intersection to locate it, Screener to identify candidates, and Compare plus the underlying holdings to assess whether a different fund would help. The aim is to understand the role each investment plays and whether the combination still fits your goals.

And for Morningstar Investor subscribers, you can take comfort in knowing that the research, frameworks, and tools used by Morningstar analysts are available to support your own decision-making.

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