How to avoid stock overlap in world full of ETFs

investmentnews.com:

Even on Wall Street, there’s such a thing as too much of a good thing. And that goes double when it comes to stock ownership across a client’s portfolio.

With an estimated 3,000 ETFs available in the U.S., stock overlap simply can’t be prevented. For example, even if a financial advisor tried to pair an S&P 500 growth ETF with an S&P 500 value ETF, there would be exposure to many of the same companies in both funds.

Not to mention a pretty high correlation between the two. The correlation between, say, the Vanguard Growth Index Fund (VUG) and the Vanguard Value Index Fund (VTV) is a fairly lofty 0.81, begging the question of whether a client needs to hold both.

Throw a sector ETF or two into a client’s portfolio and the duplication really starts to add up.

“When we are meeting with a new client, we always put their portfolio into Morningstar workstation to see their ‘stock intersection’ report,” said Scott Bishop, certified financial planner at Presidio Wealth Planners. “This report shows which stocks are held in which ETFs or funds, plus whatever they may own directly in a long position. By using that Morningstar Intersection report, we can [use direct indexing to] remove funds that are just duplicating the same holdings and keep the ones we like more.”

That said, Bishop doesn’t mind overweighting a stock or sector he likes for a brief period, even if he has to trim it later.  However, that trimming results in taxes, which is why with larger after-tax accounts, he prefers to utilize separately managed accounts or direct indexing solutions.

Jon Swanburg, president of TSA Wealth Management, is also a fan of using direct indexing to avoid overlap or minimize exposures to certain companies or sectors.

“Investors simply