
Some investors may turn to sector index funds when they believe a particular sector has the potential to outperform the market as a whole. What they may not realize is that such funds can be heavily concentrated in only a handful of companies.
"Many index funds that track sector indexes are weighted based on market capitalization, so in some funds, a relatively small number of the largest stocks can account for an outsize share of the holdings—and therefore can substantially influence the fund's performance," explains Emily Doak, CFA®, director of ETF and index fund research at the Schwab Center for Financial Research.
In the U.S. energy sector, for example, Chevron and Exxon Mobil dwarf most other companies. As a result, they account for more than a third of some energy index funds' assets.1
Likewise, some technology index funds at one point held nearly half their assets in three large companies: Apple, Microsoft, and Nvidia.2 To be fair, funds that track the S&P 500® Index—which measures the performance of 500 leading publicly traded U.S. companies from a broad range of industries—are also highly exposed to these and other tech companies, since technology makes up roughly a third of the index. So, if you already hold an S&P 500 index fund, adding a tech-specific fund to your portfolio could add to your potential overconcentration.
Heavyweights
An investor who held a tech-focused index fund and a fund tracking the S&P 500 Index—which had nearly 30% allocated to tech as of late March 2025—would have been overly impacted when tariff news rocked the markets earlier this year.

Source: S&P Dow Jones Indices, as of 03/31/2025.
As of 09/28/2018, the Global Industry Classification Standard (GICS®) broadened the Telecommunications sector and renamed it Communication Services. This reclassified some companies from the Consumer Discretionary sector. The Real Estate sector was launched in 2016.
"Investors considering a sector fund should look carefully—not only at its holdings and weightings, but also at their overall portfolio," Emily says. "That way, you can understand the full breadth of your exposure and make sure it's in line with your investing goals and risk tolerance."
To research sector funds, log in to Schwab's ETF Screener or Mutual Fund Screener, select Fund Category under Basic, then Sector Equity and choose the relevant category. You can view a fund's top holdings by clicking its ticker symbol, then clicking its full name in the pop-up and scrolling down to the Holdings section.
1,2Schwab's ETF screener tool as of 01/31/2025.
Discover more from Onward
Keep reading the latest issue online or view the print edition.

Shopping for sector investments?
Explore more topics
Investors should consider carefully information contained in the prospectus, or if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing.
Investing involves risk, including loss of principal.
Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
A sector fund focuses on companies in a specific sector and may involve a greater degree of risk than an investment in funds with broader diversification.
All names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.
Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, may be illiquid, and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.