Fund Overlap

Fund Overlap

A situation in which two or more investment vehicles in a portfolio hold largely the same securities. For example, one may hold an index fund tracking the S&P 500 and a mutual fund that is actively managed in theory but, in reality, largely tracks the S&P 500. Fund overlap may result in a portfolio that appears diversified but is, in fact, not. This can add to the portfolio's risk; as a result, risk averse investors need to exercise the most caution over fund overlap. See also: Closet index fund.

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Fund overlap. Fund overlap may occur if more than one mutual fund or exchange traded fund (ETF) in your portfolio invests in the same underlying security or securities.

For example, you might own an ETF and an actively managed mutual fund that both hold a large number of shares in the same group of stocks. The result is that your portfolio may not be as diversified as you intend.

To prevent excessive overlap, it's always a good idea to review the major holdings listed in a fund's prospectus or on the fund company's website, making sure that you're not overweighting your portfolio with a security you already own through another investment.