Diversification vs Duplication

Diversification vs Duplication

At Albion, we often come across portfolios that appear diversified at first glance. They typically contain a mix of ETFs and active funds spread across the S&P 500, global equities, tech sectors, and a few niche themes for good measure. On the surface, these portfolios seem broad, exciting, and modern.

Here’s a classic example we frequently encounter:

• S&P 500 ETF – 20%

• MSCI World ETF – 50%

• US Technology ETF – 10%

• Global Semiconductors – 10%

• Global Innovation Fund – 10%

While this might seem like a well-constructed mix, a deeper look tells a different story. In reality, portfolios like this are often made up of the same stocks repeated across multiple funds.

The S&P 500, for example, is essentially the US equity component of the MSCI World. The US Technology ETF largely mirrors the tech-heavy portion of the S&P 500. And those thematic funds? Semiconductors and innovation strategies typically revolve around the same top tech names like Apple, Microsoft, and Nvidia.

Data sources: iShares US Technology ETF (IYW), Xtrackers MSCI Innovation ETF (XNNS).Portfolio data as reported at 20/07/2025.Stocks highlighted are common to both funds.

Rather than offering true diversification, this type of construction introduces inefficient duplication - the illusion of spreading risk, while in fact concentrating exposure to the same economic narratives and performance drivers. It’s like ordering a flight of different craft beers only to find they’re all just subtle variations of the same pale ale.

This doesn’t mean component funds or thematic exposures are inherently bad. In fact, they can add value when used purposefully. Thematic tilts, for instance, can help align a portfolio with one’s values or strongly held beliefs. But for these additions to be effective, portfolios need to be built coherently - with clear awareness of stock and sector overlap and rational expectations for the future.

A helpful mental model: think of funds as different mixes of the same underlying global stocks and bonds. If you’re holding five scoops of the same flavour, don’t expect the taste to change.