Fund Overlap

AAA

DEFINITION of 'Fund Overlap'

A situation resulting from owning several mutual funds or exchange-traded funds (ETFs) that hold positions in some of the same securities. Fund overlap reduces the benefits of diversification for the investor.

INVESTOPEDIA EXPLAINS 'Fund Overlap'

While small amounts of overlap are to be expected, extreme cases of fund overlap can expose an investor to high levels of company or sector risk, which can distort portfolio returns when compared with a relevant benchmark.

It can be very difficult for a retail investor to keep up fund holdings, but a quarterly or annual check can help investors to understand the strategy of each individual fund, and provide an opportunity to compare top holdings from one fund to another.

If, for example, two separate mutual funds both have overweighted the same stock, it might be worth replacing one of the funds with a similar fund that doesn't carry that stock as a top holding. If a specific sector is overweighted in two funds (such as an overweight position in technology relative to the S&P 500), the investor will need to weigh the benefits and risks of this increased exposure.

RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Overweight

    1. A situation where a portfolio holds an excess amount of a ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount ...
  4. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
  5. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
RELATED FAQS
  1. What techniques are most useful for hedging exposure to the banking sector?

    The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >>
  2. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  3. During what stage of the economic cycle should I invest in the drugs sector?

    Invest in the drugs sector during the expansionary stage of the economic cycle, when the broader market is rising. The absolute ... Read Full Answer >>
  4. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  5. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
  6. What is the automotive sector?

    In the world of finance, the automotive sector represents the financial performance and economic variables related to automobile ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.
  2. Retirement

    Too Many Mutual Funds?

    Is there a magic number you should be aiming for? Find out here.
  3. Options & Futures

    20 Investments You Should Know

    To take advantage of all your investing options, you need to know what your choices are. Here we tell you about the diverse features and advantages of 20 different financial instruments.
  4. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  5. Mutual Funds & ETFs

    U.S. Investors Are Seeking Opportunities Overseas

    A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended.
  6. Investing

    Three Portfolio Moves To Consider Now

    What portfolio moves should you consider making as the 2nd quarter kicks off? Before we focus on the future, let’s first reflect on the 1st Q surprises.
  7. Investing Basics

    Manage Investments And Modern Portfolio Theory

    Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ...
  8. Options & Futures

    Key Factors Of The Russell 2000 Index

    The Russell 2000 index represents the small cap universe, with a broad selection of fast growth companies at the bottom end of the capitalization spectrum.
  9. Chart Advisor

    Interested in Growth Stocks? See These 4 ETFs

    Given the rise in popularity of growth ETFs, there are several interesting growth stock choices for investors.
  10. Chart Advisor

    ChartAdvisor for April 17 2015

    A weekly technical summary of the major U.S. indexes.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center