Choose ETFs that truly diversify portfolios
Advisers often add ETFs without checking if they reduce portfolio risk. Experts say look-through analysis of holdings, factor exposures and geography is required so each ETF earns its place.
Financial advisers frequently add exchange-traded funds to client portfolios without checking whether the new funds reduce overall portfolio risk, industry specialists warn. They say advisers should run look-through analysis of holdings, factor exposures and geographic weightings before adding an ETF.
Andrea Acimovic, portfolio strategist at Elston Consulting, used a common combination to illustrate the problem. Owning a global ETF, an S&P 500 ETF, a technology ETF, an AI ETF and a semiconductor ETF can still concentrate a portfolio in a few large-cap names. She contrasted “diversification by ticker and diversification by risk,” and used the example that multiple funds can leave heavy exposure to a single company: “Congratulations, you really like Nvidia.”
Arun Subbiah, founder and CEO of Meteor, which uses artificial intelligence to help advisers construct portfolios, criticised basic overlap tools that only flag shared top holdings. He said those tools do not show how stocks behave together under stress or whether advisers have doubled up on factor bets. “Most advisers are still ticking a box marked ‘diversified’ without ever running the numbers behind it,” he observed.
Whether an additional ETF improves a portfolio depends on the exposure gaps it fills. A sector fund focused on financials or consumer staples can reduce a technology tilt but increase overall exposure to US equities if names such as JPMorgan Chase and Coca-Cola gain weight.
Acimovic warned that different holdings can still load a portfolio with the same factor, sector, geography or macro sensitivity. She said artificial intelligence and improved tools should make look-through analysis easier by identifying overlaps and explaining how positions interact in different market conditions.
Both experts said every ETF in a portfolio should “earn its place” by broadening exposure that is not already present. Subbiah advised advisers to assess whether a fund’s return profile is meaningfully different from existing holdings and whether it fits the firm’s investment approach.
They recommended specific checks: perform look-through and factor analyses, compare return profiles, run stress scenarios to see how holdings behave together, and confirm the ETF fills a real gap. Applying those checks helps advisers decide whether to keep a compact portfolio or add funds for clear strategic reasons.
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