These index funds have a maximum of 5% in any one stock
The Dow Jones Industrial Average, S&P 500, Nasdaq 100 and even Russell 3000 don’t pass that test anymore.
If you speak with a financial advisor, you might hear the common refrain that no individual stock should make up more than 5% of your overall portfolio, and that a well-diversified portfolio includes mostly index funds instead of individual stocks. For beginners, that often means building a very simple portfolio that mostly consists of a major stock market index fund, plus a smaller amount of money in a bond fund.
Here’s the problem: In this day and age, these pieces of advice are increasingly in tension. The Dow Jones Industrial Average, S&P 500 index, Nasdaq 100 index, and even the Russell 3000 index all have multiple stocks that make up at least 6% each of their overall market caps.
That means that many people who are doing the “right thing” — simple, passive, index-fund-based investing — are unwittingly breaking the 5% rule. They’re ending up with portfolios that are riskily concentrated in mega-cap stocks like Nvidia (NVDA) and Apple (AAPL).
So how can someone build a simple, well-diversified portfolio in this world where multi-trillion-dollar companies dominate the major indexes?
Below, we’re looking at some lesser-known types of index ETFs that have a maximum allocation of 5% in any individual stock.
We’ve found the largest ETFs by assets under management (AUM) for each category below using data from VettaFi and ETF.com, and we’ve checked the weightings for each individual fund via the fund’s website.