Three exchange-traded funds (ETF) can look like diversification. Yet at the same time can also be three different ways of buying Nvidia.
That’s the problem with judging a Tax-Free Savings Account (TFSA) by the number of ticker symbols it contains. An investor might own a global ETF, an S&P 500 ETF, and a total U.S. market ETF and feel beautifully diversified.
Look underneath, and the same handful of companies may be doing much of the work. That doesn’t make the ETFs bad; it means you should know what each new fund actually adds.
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Look underneath
Consider three popular types of ETFs. Vanguard All-Equity ETF Portfolio (TSX: VEQT) owns thousands of stocks across Canada, the United States, developed international markets, and emerging markets. Vanguard S&P 500 Index ETF (TSX: VFV) owns large U.S. companies. Vanguard U.S. Total Market Index ETF (TSX: VUN) goes broader, adding mid-, small-, and micro-cap U.S. companies.
Those descriptions sound different, and granted they are. But they also share many of the largest holdings. Nvidia, Apple, Microsoft, Amazon, Alphabet, Broadcom, Meta Platforms, and Tesla appear prominently across the U.S. portions of these funds. So understanding how ETFs work means looking through the wrapper instead of assuming each fund represents a completely new investment.
Same stocks
The concentration becomes clearer with the three biggest names. As of August 31, Nvidia represented about 8.1% of VFV and 6.8% of VUN. Apple accounted for roughly 7% and 6.2%, respectively. Microsoft added another 5.7% and 5%.
Even VEQT, despite its global reach, had about 3.1% in Nvidia, 2.8% in Apple, and 2.3% in Microsoft. Imagine splitting a portfolio equally across VEQT, VFV, and VUN.
| STOCK | VEQT WEIGHT | VFV WEIGHT | VUN WEIGHT | APPROX. EQUAL WEIGHT IN PORTFOLIO |
|---|---|---|---|---|
| Nvidia | 3.1% | 8.1% | 6.8% | 6.0% |
| Apple | 2.8% | 7.0% | 6.2% | 5.4% |
| Microsoft | 2.3% | 5.7% | 5.0% | 4.3% |
| TOTAL | 15.7% |
More than 15% of the whole portfolio would depend on three companies. That may be perfectly acceptable for some, but should be intentional.
More isn’t always more
VFV and VUN provide a good example. VFV focuses on approximately 500 large U.S. businesses. VUN owns the wider U.S. market, so it already contains those same large companies plus smaller ones. Holding both doesn’t suddenly double diversification. It simply increases the amount allocated to U.S. stocks, particularly the mega-cap companies that dominate both indexes.
Adding VEQT creates the same issue from another direction. VEQT already has substantial U.S. exposure alongside Canada and international markets. An investor who owns VEQT and then keeps adding VFV may think they’re adding a new investment. They’re mainly increasing the U.S. allocation already inside VEQT.
So while VDV is a strong, low-cost U.S. core holding, it isn’t a complete global portfolio. Its market-cap weighting can also create more concentration after the largest companies have strong runs.
TFSA space matters
Overlap deserves extra attention inside a TFSA because contribution room is limited. I’d want every holding to have a clear job. Maybe VEQT is the global core. Maybe VFV is added because the investor deliberately wants more U.S. exposure. Maybe VUN replaces VFV because broader U.S. coverage is preferred.
Any of those approaches can make sense. Owning all three simply because each ETF looks diversified on its own is different. There are other overlaps to check too. Canadian dividend ETFs may all lean heavily toward the same banks and pipelines. Technology ETFs can duplicate stocks already sitting near the top of an S&P 500 fund.
Bottom line
I don’t count ETFs when deciding whether a portfolio is diversified; I count exposures. If three funds all put their largest dollars into Nvidia, Apple, and Microsoft, owning three tickers doesn’t change that.
Before adding another ETF to a TFSA, I’d ask one question: “What does this fund give me that I don’t already own?”
If the answer is “more of the same stocks,” at least make sure that’s exactly what you wanted.
