Sector ETFs Exposed: Most Concentrated in Just a Few Top Holdings

Investors often turn to sector ETFs to gain exposure to specific industries without having to pick individual stocks. However, a closer look at the S&P 500 sector ETFs reveals that most are not as diversified as they seem.

The State Street Consumer Discretionary Select Sector SPDR ETF (XLY) is the biggest offender, with Amazon and Tesla accounting for nearly 40% of its portfolio. The trio of Amazon, Tesla, and Home Depot make up a staggering 44.7% of the fund.

This concentration problem is not unique to XLY, as other sector ETFs also have their top holdings dominating the portfolio. The State Street Communication Services Select Sector SPDR ETF (XLC), for example, has Alphabet and Meta Platforms accounting for almost 40% of its weighting.

Invesco's suite of equal-weighted sector ETFs offers an alternative to these market-cap-weighted funds, which can help reduce concentration risk. By spreading the weight among more holdings, investors may get a closer approximation of true sector exposure.