Concentration risk is an element of investing that ETFs hope to solve on your behalf. Because many ETFs buy the whole market, sector risk is reduced. If one sector comes under pressure and the companies operating within it lose market share, they simply fall down or out of the index. Exposure to the sector is organically reduced while companies that do well under those same market conditions take their place.

In an ETF weighted by market capitalisation, this process is more pronounced than in index trackers that are otherwise weighted. With market capitalisation, your exposure to a bad share price is reduced as the company in question loses value. By the time the share has lost enough market value to fall out of the index, your exposure will probably be significantly smaller than when the share price started falling*.

Thriving companies and sectors usually benefit from pressure on others. Investors moving out of one investment usually seek another. In an ETF weighted by market capitalisation, your exposure to companies with rising value will increase as share prices rise. This upwards movement in price generally compensates for the falling share price of struggling companies.

If you are the type of ETF investor who is satisfied to stay invested for the long haul, this process probably won’t register on your radar. Your exposure to a single company or sector is a small piece of a much larger puzzle. However, over time your overall portfolio could inadvertently become over-exposed to a single sector or even share.

This is especially important for investors who hold sector-specific index-trackers in addition to general market exposure. For example, if you hold the Satrix FINI and the Satrix 40, you might be over-exposed to the financial services sector. Should that sector come under pressure, your portfolio will experience an uncomfortable drag.

Before making your next index-tracking investment, ask yourself:

• Do I understand which sectors my portfolio is exposed to through the index-tracking products I already own?
• Do I understand which regions my portfolio is exposed to through the index-tracking products I already own?
• Is there a single company or sector holding in my portfolio that would cause significant damage if it had to fall on troubled times?
• Am I over-exposed to a single asset class?
• Did I factor in all of my investments, including retirement annuities or pension funds, when weighing my exposure?

Hint: ETF issuers have to disclose asset and sector exposure in their minimum disclosure documents. These documents are often called “fact sheets” or “MDDs” and are published on ETF issuer websites every quarter. To determine your sectoral exposure, simply compare these documents from your various ETF issuers. Remember to include your retirement savings in this equation.

You can learn more about Minimum Disclosure documents in these three posts:

How to read your MDD objective

How to read your MDD fund information

How to read your MDD holdings

*Providing the share price didn’t fall so much in a single quarter to fall out of the index completely. In that case you’ll just go from your original exposure to no exposure.