Don't take diversification on faith — reading an ETF's concentration
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Two hundred holdings mean little if five of them are half the fund. There is a number for this.
The holding count is not the measure
"Diversified across 500 stocks" is half true. How many names a fund holds and how spread its risk is are different questions.
Cap weighting hands the biggest weights to the biggest companies. If the top 10 of a 500-stock fund are 35%, the other 490 split what is left — and individually, at well under 0.1% each, they barely register.
HHI: square the weights, add them up
The concentration index squares every holding's weight and sums the result. Squaring is the point: large weights count for disproportionately more.
One stock at 100% gives 10,000. A hundred names at 1% each gives 100. Lower means more evenly spread.
As a rough read, under 1,000 is well diversified and over 1,800 is clearly concentrated. These are not hard lines — the value is in comparing like with like.
Read it with the top-10 weight
HHI alone is abstract. Pair it with the top-10 weight and the picture sharpens.
Top 10 under 20% is a broad whole-market fund. Thirty to fifty percent is an index fund tilted to large caps. Above sixty and you are holding a concentrated portfolio.
If you bought that last one for diversification, it will not do what you expected. Not a bad product — a different one.
Concentration is not automatically bad
In a thematic fund bought for exposure to one industry, concentration is the point. A thoroughly diversified thematic fund has diluted away the theme.
The problem is a mismatch between intent and reality. If you picked a fund to own the market and its top few names are half of it, you are really betting on those names.
Holding several ETFs? Check whether their top holdings are the same. Three differently named funds leading with the same megacaps is common.
Working the number by hand
A hundred names at 1% each gives an HHI of 100. Everything in one name gives 10,000. Concentration is where a fund sits between those extremes.
A concrete case: two names at 30% each and forty names splitting the remaining 40% gives 900 + 900 + 40 = 1,840. Forty-two holdings, and the score lands in the concentrated band. Count does not guarantee spread.
That is why the weights are squared. Large positions grow in influence; tiny ones nearly vanish. It measures how far the fund leans, not how many names it owns.
Korean benchmarks read high by nature
A KOSPI 200 tracker scoring high is a fact about the market, not a flaw in the product. Cap weighting reproduces whatever the market already looks like.
So the same score means different things against different peers. 1,700 among KOSPI 200 funds is a different statement from 1,700 among global funds. Compare like with like rather than to a fixed line.
Printing the number alone loses that context, which is why the score sits next to the largest sector and the top-10 weight here. Three figures together tell you what it leans on.
What concentration cannot tell you
HHI only sees the distribution of weights, not how alike the holdings are. Fifty names at 2% each is still a concentrated bet if all fifty are the same industry.
So read sector mix alongside it. A low HHI with 70% in one sector is diversified by name and concentrated by industry. Neither figure substitutes for the other.
If you hold several funds, go one step further. Each can score low and still combine into a large single-name position. At that point what matters is combined exposure, not any one fund's score.
This article is general information, not investment advice. Investment decisions and responsibility are your own.