How to measure fund overlap

What overlap is

Overlap is the part of two funds that holds the same securities. Two funds with different names, managers, and categories can still own many of the same companies, especially the largest ones. When they do, money you meant to spread out lands in the same place.

Why a count of shared names misleads

The quick check is to count the holdings two funds share. It misleads because it ignores weight. Two funds can share 40 names that make up a sliver of each, or share 5 names that make up a third of each. What matters is how much money sits in the shared positions.

Measure it by weight

For each holding the two funds share, take the smaller of its two weights. Add those up. The total is the overlap by weight: the share of each fund that is, in effect, the same portfolio. The measure works the same in both directions: the overlap of X with Y equals the overlap of Y with X.

Hypothetical numbers, worked through

Fund X and fund Y are hypothetical. They share four holdings. In fund X, those four weigh 6%, 5%, 4%, and 3% of the fund. In fund Y, the same four weigh 8%, 2%, 4%, and 6%.

The smaller weight of each pair is 6%, 2%, 4%, and 3%. Added up, the overlap by weight is 15%. Counted by name, the two funds share four holdings. Counted by weight, 15 cents of every dollar in each fund sits in positions the other fund holds too.

Where overlap hides

Broad index funds, large-cap growth funds, and sector funds often hold the same largest companies. A total market fund holds what a large-cap fund holds, and more. Balanced and target-date funds may hold other funds inside them, so you have to look through to what those funds own. A fund's name tells you its style, not its positions.

Holdings are a snapshot. Funds report what they own as of a date, and positions change after it. Check the date before you compare.

What to do with the number

Overlap is not a flaw in itself. You may want more of the largest companies. The point is to know it is there. If overlap is high and you meant to diversify, one of the funds may be doing less work than you think, and paying two expense ratios for the same positions adds cost without adding breadth.

Overlap is not concentration

Overlap is money held twice. Concentration is money piled in one place. They often travel together, but not always. A portfolio of one fund has no overlap at all and can still be concentrated in a handful of companies or one sector. A portfolio of three funds that share nothing has no overlap and can still lean hard on one region. Check both before you decide a portfolio is spread out.

Across a whole portfolio

With more than two funds, pairs get tedious. IQ Dragon's portfolio view reads the whole portfolio at once. You enter your holdings by hand, and it groups what each fund owns. In each group, money beyond the largest single fund's exposure counts as held twice. The example portfolio on the site, twelve fictional funds, shows 45% overlap.