There can be such a thing as diversifying too much.
Investing in exchange-traded funds (ETFs) can provide you with some great diversification. But sometimes those ETFs can have significant exposure to just a few stocks, which negates the benefit of investing in ETFs for the purposes of diversification in the first place. And when you find a top-performing ETF that’s doing extremely well, that’s what you’ll often find: It’s doing well due to a few large positions.
Nvidia, Apple, and Microsoft are the top three stocks in many funds
If you’re investing in growth or tech-focused funds, you’ll often find that tech giants Nvidia, Apple, and Microsoft make up considerable positions in those ETFs.
For example, the Invesco QQQ Fund has risen by around 150% in the past five years. The Technology Select Sector SPDR Fund is up by 170%. You might think that these are phenomenal investments that can also give you some terrific diversification to keep your risk down. But is that really the case?
Nvidia, Apple, and Microsoft make up nearly 25% of the Invesco QQQ Fund’s holdings. And that percentage climbs to more than 46% in the Technology Select fund. Depending on how this trio of stocks does, the ETFs will largely follow suit as well. Not only do these stocks make up a significant part of these ETFs, but they are also industry leaders; how they are performing can often be indicative of the overall tech sector.
This raises a simple question: Are you better off just holding these three stocks, or an ETF?
The big three versus ETFs
Let’s suppose you invested $10,000 into each one of those big three stocks five years ago. If you did, the value of those investments would be worth a total of $353,000, with the bulk of that coming from Nvidia, which would be worth a staggering $280,000 just on its own.
Now, what if you decided that the safer option was to invest all of that money into just an ETF. Together, that would mean you put $30,000 into a fund such as the Invesco QQQ ETF, which gives you a position in the top 100 non-financial stocks on the Nasdaq or the Technology Select fund, which focuses on the tech sector of the S&P 500. Let’s also include the SPDR S&P 500 ETF, which can provide even greater diversification. Here’s what a $30,000 investment from five years ago would be worth in each one of those funds today:
- Technology Select Sector SPDR Fund: $80,000
- Invesco QQQ Fund: $73,000
- SPDR S&P 500 ETF: $56,000
Those returns don’t come close to the gains you would have earned by just investing in the top three tech giants. Even if you exclude Nvidia and its oversized gains over the past couple of years due to its dominance in the chip market, your portfolio would still be worth around $73,000 from investing just $10,000 into Microsoft and Apple. At a combined $20,000, it would be a smaller investment and the gains would be comparable to what you would get with the QQQ Fund when investing $30,000.
Are you better off going with top stocks or an ETF?
Peter Lynch famously referred to it as “diworsification” rather than diversification, simply because by trying to become too diverse, you end up sacrificing too much in the way of potential returns. Having a few good stocks can sometimes be better than having hundreds of smaller positions that end up resulting in underwhelming returns.
Diversification can be useful if you’re not comfortable picking stocks. But, by and large, investing in the top tech stocks has generally been a good move for investors over the years. While there will be bad years, in the long run, they are likely to generate great returns for your portfolio. And by going with the best and biggest names in the sector, you aren’t necessarily taking on a whole lot of risk, either.
If you’re not familiar with a sector or just want extremely broad exposure, then an ETF may still be a desirable option for you. But for many investors, stock picking works fine as you don’t have to go into the weeds and do a lot of digging to find good investments to buy and hold; oftentimes, the best and safest stocks to own aren’t all that hard to find. Buying and holding shares of these three tech companies can be a better move than trying to find the right ETF.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends Nasdaq and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.