ETFs for Diversification: Why You Must Check Their Holdings

Exchange-traded funds (ETFs) have surged in popularity, and many investors now build entire portfolios using only ETFs. That approach can work well, but it requires attention to what each ETF actually holds so investors do not unknowingly concentrate their risk.

Financial advisers say allocating a portfolio entirely to ETFs can be a sensible strategy, provided investors examine the fund holdings, understand the asset allocation and align those exposures with their time horizon and risk tolerance.

Jonathan Rivard, general principal at Edward Jones, stresses the importance of a clear view of what sits inside the ETFs you own. “You could absolutely be 100% invested in ETFs. But you want to know what’s in the ETF and what the allocation looks like. Some ETFs will be balanced; they’ll have a mix of stocks and bonds in them. Some will be sector products,” Rivard said. “The important thing comes down to understanding what does this basket hold? And if I own multiple ETFs, what does it look like across multiple ETFs in terms of asset allocation?”

Diversify by asset type, not just by country

Prerna Mathews, vice-president of ETF product strategy at Mackenzie Investments, advises investors to look beyond simple geographic diversification. Many investors start with core exposure to Canadian, U.S. and international equities, but that is only the first step.

“Think about how fixed income fits into the portfolio, consider real assets, explore thematic ETFs and alternative strategies — all are available in ETF form and can add different drivers of return,” Mathews said. Including a range of asset classes helps spread risk in ways that geography alone cannot.

Mathews also recommends mixing investment styles. Combining broad index ETFs with actively managed or low-volatility ETFs can smooth returns and change the portfolio’s risk profile. Time horizon plays a major role: investors with longer horizons can tolerate greater equity exposure in pursuit of growth, while those nearer retirement often prioritize capital protection and income.

Fixed income deserves specific attention. Mathews notes the importance of understanding the yield differences across maturities. Most investors will not hold every duration of bonds, so it’s crucial to know the trade-offs. “In some cases, you can get a very attractive yield at the short end of the curve without taking on significant risk as you would on the long end,” she said. Including some short-term fixed income can be a prudent compromise, while broad aggregate bond exposure is typically a sensible long-term position.

The growing appeal of “set it and forget it” ETFs

A rising trend is the use of asset-allocation ETFs, which package multiple underlying ETFs into a single fund. Mathews describes these all-in-one products as essentially “eight to 12 ETFs all packaged up in one,” making them attractive core holdings for investors who prefer a hands-off approach.

While these multi-asset ETFs simplify portfolio construction and rebalance automatically, investors should still perform a full look-through to avoid unintended overlaps. Over-diversification or overlapping exposures can quietly increase concentration risk or dilute intended exposures.

For example, an investor who owns a Canadian equities ETF and also holds an asset-allocation ETF that contains a significant allocation to Canadian stocks may end up with unexpectedly high exposure to the same market. Likewise, because the Toronto Stock Exchange’s financials sector makes up a large portion of the index (around 30%), owning both a TSX-focused ETF and a Canadian-banks ETF could create excessive concentration in bank stocks.

“There is a risk of having too much product in your portfolio. Sometimes that can creep up on us when we’re not doing a full look through to what each ETF might be investing in,” Mathews warns. Regular portfolio reviews and a clear view of total exposures help prevent this creeping duplication.

Read more about ETFs:

• Best ETFs in Canada for 2025
• Single-stock ETFs: Approach with caution
• Buying ETFs in Canada Tool: The MoneySense ETF Screener
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