3 Highly Concentrated ETFs Delivering for Investors

Experts have long harped on the advantages of diversification within portfolios and, over time, it’s a concept that has served investors well.

Diversification is also a big reason why so many advisors and investors of all stripes have flocked to equity-based exchange traded funds over the past decade. The belief is that ETFs and index funds linked to familiar, large-cap equity gauges, such as the Nasdaq-100, Russell 1000 and S&P 500, are inherently diverse at the holdings. Reality pains a different picture.

As of Feb 12, the six $1 trillion-plus companies in the S&P 500 commanded more than 28% of the index’s weight with the top 25 holdings representing 46% of the benchmark. That’s not diverse, but complaints are minimal at a time when domestic stocks are at all-time highs.

With that in mind, here are some other highly concentrated ETFs that are delivering the goods for investors.

VanEck Semiconductor ETF (SMH)

The VanEck Semiconductor ETF (SMH) is indeed concentrated. Nvidia (NVDA) is the fund’s largest holding at 25.06%. Add in Taiwan Semiconductor (TSM) and this ETF allocates almost 35% of its roster to just two of its 25 holdings.

That’s highly concentrated, but it’s a strategy that’s worked well. For three years ending Feb 15, SMH returned nearly 63% while the competing iShares ETF gained “just” 48%. It’s helped to be overweight Nvidia, which is one of the stocks most correlated to the artificial intelligence (AI) theme.

“The soaring increase in spending on artificial intelligence has exceeded expectations, and tangible results are already being seen,” notes Antonio Ernesto Di Giacomo, analyst at XS.com. “Nvidia, a leading manufacturer of advanced chips for enabling next-generation AI services, is experiencing remarkable growth, evidenced by the impressive market performance of its shares. Its central role in this emerging trend is driving its success and positioning it as a key player in today's technology landscape.”

Invesco NASDAQ 100 ETF (QQQM)

The Invesco NASDAQ 100 ETF (QQQM) is the low-cost counterpart to the famed Invesco QQQ (QQQ), meaning both ETFs have the same lineups because they each track the Nasdaq-100 Index.

While there is significant overlap between the Nasdaq-100 and the S&P 500, there are also big differences novice investors need to be aware. The Nasdaq-100 is a collection of the 100 largest non-financial services companies trading on the Nasdaq, meaning QQQM features almost no exposure to what is the second-largest sector weight in the S&P 500. Likewise, the combined weight of energy, materials, real estate and utilities stocks in QQQM is 1.82% compared with 10.30% in the S&P 500.

Currently, QQQM’s top five holdings account for a third of the fund’s portfolio. That’s high concentration, but also unlikely to draw complaints because QQQM beat the S&P 500 by 950 basis points over the past 24 months.

Natixis Loomis Sayles Focused Growth ETF (LSGR)

The Natixis Loomis Sayles Focused Growth ETF (LSGR) hails from a fund issuer steeped in active mutual fund tradition. In that arena, highly concentrated equity portfolios have long been deployed because it’s an avenue through which fund managers can overweight a benchmark’s better performers while underweighting or eliminating duds.

LSGR’s “manager takes a long-term, private equity ownership perspective, focusing on high-quality businesses with truly sustainable competitive advantages,” according to the issuer.

LSGR is concentrated as its top 10 holdings combine for 67.5% of the roster. Within that group, the quintet of Nvidia, Meta Platforms (META), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG) combine for 43%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SMH NVDA TSM QQQM QQQ LSGR AMZN MSFT GOOG