What's in Your Sector Index Fund?
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.
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