We Found 19 Well-Diversified ETFs That Pass the 5% Test

If you speak with a financial advisor, you might hear the common refrain that no individual stock should make up more than 5% of your overall portfolio, and that a well-diversified portfolio includes mostly index funds instead of individual stocks. For beginners, that often means building a very simple portfolio that mostly consists of a major stock market index fund, plus a smaller amount of money in a bond fund.

Here’s the problem: In this day and age, these pieces of advice are increasingly in tension. The Dow Jones Industrial Average, S&P 500 index, Nasdaq 100 index, and even the Russell 3000 index all have multiple stocks that make up at least 6% each of their overall market caps.

That means that many people who are doing the “right thing” — simple, passive, index-fund-based investing — are unwittingly breaking the 5% rule. They’re ending up with portfolios that are riskily concentrated in mega-cap stocks like Nvidia (NVDA) and Apple (AAPL).

So how can someone build a simple, well-diversified portfolio in this world where multi-trillion-dollar companies dominate the major indexes?

Below, we’re looking at some lesser-known types of index ETFs that have a maximum allocation of 5% in any individual stock.

We’ve found the largest ETFs by assets under management (AUM) for each category below using data from VettaFi and ETF.com, and we’ve checked the weightings for each individual fund via the fund’s website.

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World stock market index ETFs

World stock market index ETFs are comprehensive funds that try to get a piece of every publicly-traded company on the planet — or, at least, as many as they feasibly can.

These funds can be especially useful for building a simple, two-fund portfolio that passes the 5% test because they contain all the large-cap U.S. stocks you’ll find in a typical large-cap index fund, but they’re diluted by the addition of smaller U.S. stocks as well as international stocks.

Below are the three largest world stock market index ETFs by AUM that pass the 5% test.

• Vanguard Total World Stock ETF (VT)

• iShares MSCI ACWI ETF (ACWI)

• State Street SPDR Portfolio MSCI Global Stock Market ETF (SPGM)

International or Ex-US ETFs

International ETFs often pass the 5% test for the same reason world stock market index ETFs do — it’s a big planet out there, and that means these funds generally hold too many stocks for any to exceed 5% of overall market cap. Below are the three largest non-U.S. international ETFs by AUM that pass the 5% test.

One caveat: If you’re looking for index funds that behave much like U.S. large-cap index funds, but are less concentrated, these may not do the trick. International stocks are a distinct asset class that don’t always move the same way U.S. stocks do.

• Vanguard FTSE Developed Markets ETF (VEA)

• iShares Core MSCI EAFE ETF (IEFA)

• Schwab International Equity ETF (SCHF)

Equal-weight index ETFs

Equal-weight index ETFs are exactly what they say on the tin — ETFs that track all the stocks in a major index, but with equal weightings instead of the price or market cap weightings of typical index funds.

Below are the largest equal-weight ETFs by AUM for the S&P 500, Nasdaq 100, Dow Jones Industrial Average and Russell 1000 indexes. Note that although equal-weight index funds avoid the concentration risk of typical index funds, they often have higher fees and lower average returns.

• Invesco S&P 500 Equal Weight ETF (RSP)

• First Trust Nasdaq 100 Select Equal Weight ETF (QQEW)

• First Trust Dow 30 Equal Weight ETF (EDOW)

• Invesco Russell 1000 Equal Weight ETF (EQAL)

Small-cap ETFs

Small-cap ETFs generally pass the 5% test because they’re made up of a lot of small companies. Below are the three largest small-cap ETFs by AUM.

That said, small-cap stocks can be volatile, and may be more sensitive to macroeconomic conditions (such as interest rate changes) than large-cap stocks. They easily pass the concentration test, but they don’t necessarily behave in a similar way to large-cap index funds.

• iShares Core S&P Small Cap ETF (IJR)

• iShares Russell 2000 ETF (IWM)

• Vanguard Small Cap ETF (VB)

Extended market ETFs

Extended market ETFs are a lot like small-cap ETFs, but they also include mid-cap stocks. Many of the same caveats apply as with small-cap ETFs — smaller companies may be more volatile and economically-sensitive, and an index fund that doesn’t contain any large-caps is not going to behave the same way as a large-cap index fund.

Below are the three extended-market ETFs that have the highest AUM numbers and pass the 5% test:

• Vanguard Extended Market ETF (VXF)

• iShares Russell 2500 ETF (SMMD)

• Capital Group U.S. Small and Mid Cap ETF (CGMM)

Dividend ETFs

For the most part, the multi-trillion-dollar tech companies which dominate the major indexes do not pay significant dividends, which means that ETFs that focus on dividend stocks are often relatively unconcentrated. Below is a list of the largest dividend ETFs by AUM that pass the 5% test.

One thing to note: Although dividend stocks provide income that can compound your returns, they tend to be somewhat “boring” companies that don’t always keep up with non-dividend payers in terms of capital gains.