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For as much good as the ETF industry has done in offering hundreds of low-cost investment products targeting a wide range of markets, sectors, and themes, it is not without risks. The idea of “set it and forget it” can work at a high level, but it can also overlook portfolio construction problems that may develop over time.
Investors who follow core portfolio construction principles and revisit their holdings periodically are better positioned for long-term results. Those who ignore potential hazards may end up with a portfolio that behaves differently than intended.
Tech ETFs, including the Invesco QQQ ETF (QQQ), have been strong performers over the past decade. However, the rally led by the “Magnificent Seven” has increased concentration and made some portfolios more top-heavy, raising risk.
The Magnificent Seven stocks plus Broadcom account for 44% of the index. After the 2023–2025 period, investors appeared less concerned because the group was lifting overall performance. But as of March 30, Apple, Microsoft, Nvidia, Meta Platforms, Alphabet, Amazon, and Tesla were each trading at least 13% below their all-time highs, turning parts of that concentration into a drag on the index.
When a fund—or a portfolio—is heavily dependent on a small number of stocks, the risk of larger declines can increase. The article argues that greater diversification may help reduce that risk.
A common misconception is that holding more funds automatically increases diversification. That can be true when ETFs cover meaningfully different market segments, but it may not help when funds largely hold the same underlying securities.
For example, the article cites a combination of the Vanguard S&P 500 ETF (VOO), the Vanguard Total Stock Market ETF (VTI), and QQQ:
The article emphasizes that investors may need to review holdings in detail. Owning multiple funds with similar portfolios may not provide much incremental diversification.
Without periodic review, an investor’s allocation can drift away from the original risk profile. The article describes a scenario in which a portfolio was set up with 70% stocks and 30% bonds at the beginning of 2022.
Since then, stocks have risen even through the 2022 bear market, while bonds—especially Treasuries—have performed poorly. As a result, the original 70/30 allocation could shift toward something closer to 80/20, which may be more risky than the investor intended.
Regularly reviewing and rebalancing helps keep asset allocation aligned with stated goals. The article also notes that rebalancing can support a “sell high, buy low” approach, which has been associated with improved returns over time.
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