Have you ever been at a party where someone took a big bite of a nacho, then dipped it back into the salsa for another serving? It’s called double dipping. Pretty yucky, right? And not very healthy.
You may be doing the same thing with your investing and not even know it.
Let’s say to have a diversified portfolio you wanted to buy some growth stocks, some value stocks and some international stocks. You found three Exchange Traded Funds (ETFs) that seemed to offer just what you wanted: Fidelity Momentum Factor ETF (FDMO), Schwab U.S. Large Cap Value ETF (SCHV) and Vanguard Total World Stock Index Fund (VT).
Did you get what you wanted? Or were you guilty of double dipping? Let’s take a look.
All three ETFs hold some of the same stocks in their top ten holdings: Apple, Microsoft, Johnson and Johnson, JP Morgan Chase, and Exxon Mobil. These five stocks account for 13.8% of assets at FDMO, 13.5% at SCHV and 4.8% at VT. If you own all three ETFs, you are definitely doing some double dipping in stock selection.
All three ETFs have concentrations in technology and financial stocks. These two sectors account for 39% of assets at FDMO, 36% of assets at SCHV, and 35% of assets at VT. Looks like more double dipping.
What about performance? Here we see some differences. FDMO is up 14.3% year to date, SCHV is up 9.7%, and VT is up 17.8%. In comparison, the S&P 500 Index (SPX) is up 14.1% for the same time period. So the growth and international stocks outperformed the SPX, while the value fund trailed.
So what does this tell us? Yes, double dipping regularly occurs among large ETFs. After all, they have a lot of dollars to invest, and there are a limited number of stocks they can invest in. However, just because several ETFs are invested in the same stocks, that doesn’t necessarily mean they will have the same performance. The point of portfolio diversification is to have things in your portfolio that don’t all move in the same direction at the same time. So when one ETF is going down, some others are either going up or not going down quite as much.
How can you figure all this out? If you have an online brokerage account, dig into its research section to find the information. If you’re using a financial advisor, ask them.
The point is to know what you’re investing in and what role you expect it to play in your portfolio. Don’t buy an ETF just because of the name. If you have to double dip, do it on purpose and not just because you didn’t do enough research.
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Frances Aylor 