Most people check diversification by counting funds. Three ETFs feels safer than one. But funds are containers, and what matters is what is inside them — two broad, sensible, low-cost funds can hold substantially the same companies, and leave you concentrated in a way neither fund name suggests.
Geographic concentration at least announces itself: a fund with "Europe" or "US" in the name tells you where it invests. Sector concentration hides better, because it is usually a side effect rather than a stated policy.
Nobody sets out to put a third of their money in one industry. It happens by accumulation — a world fund, a technology fund because it did well, a domestic fund whose index is dominated by a handful of large firms — and each purchase looked reasonable in isolation.
Most index funds weight by market capitalisation: each company appears in proportion to its total market value. That has an unavoidable consequence — whichever sector currently contains the largest companies will dominate the index, and it will dominate every fund tracking that index.
This is not a flaw in the funds. A market-cap index is doing exactly what it says: reflecting the market as it is. The mistake is reading "tracks the whole market" as "spreads risk evenly". Those are different claims, and only the first one is being made.
It also means concentration changes over time without you trading. As one sector outgrows the others, its weight in your existing holdings rises on its own. A breakdown you checked three years ago is not the breakdown you have now.
Every fund page shows its ten largest positions, and it is tempting to compare two funds by scanning those lists. It does not work.
Ten names out of several hundred can be a small slice of a fund, and two funds can share very little in their top ten while overlapping heavily further down. The reverse also happens: identical top tens, quite different tails. The top ten answers "what are the biggest bets?" — a fine question, but not the one you are asking.
What you need is the sector breakdown of the full portfolio, for each fund, weighted by how much of that fund you hold, then summed across everything you own. That is the only view in which two funds quietly making the same bet becomes visible.
"Looks a bit concentrated" is not something you can track. There is a standard measure that is easy to compute by hand: the Herfindahl–Hirschman index, or HHI. Square each share, add them up.
The useful part is its reciprocal. One divided by the HHI gives the effective number of sectors — how many equally-sized sectors your portfolio behaves as though it holds.
Hypothetical illustration. Suppose your equity exposure breaks down across five sectors as 40%, 25%, 15%, 10% and 10%:
0.40² + 0.25² + 0.15² + 0.10² + 0.10² = 0.265
1 ÷ 0.265 = 3.8 effective sectors
Five equal sectors of 20% would give an HHI of 0.200 and exactly 5 effective sectors.
So a portfolio that touches five sectors carries roughly the concentration of one holding under four. That gap is the thing to track. Because it is a single number, you can record it and watch it move — which matters, since drift is the whole problem.
One caveat on any score like this. It is only as good as its coverage. If you can only get a breakdown for some of your holdings, the number describes those holdings, not your portfolio — and a score computed over partial data will look better than reality, because whatever is missing contributes nothing to the measured concentration. Always check what fraction it actually covered.
Check overlap before buying, not after. The cheapest moment to avoid a duplicate bet is before the purchase. Once you hold both, fixing it may cost you a taxable disposal.
Be suspicious of thematic funds as diversifiers. A fund concentrated in one theme by design is not a way to spread risk — it is a deliberate extra bet. That can be a perfectly good decision; it is a bad accident.
Decide your tolerance in advance. Pick the maximum weight you are willing to hold in any one sector before you look at your current numbers. Deciding afterwards, with the figures in front of you, is how a limit becomes whatever you already have.
Re-check on a schedule. Sector weights drift on their own. Fold this into whatever review you already do for your allocation rather than making it a separate task.