Lowering Your Concentration Risk Using Ex-Sector ETFs

The Risk of a Concentrated Portfolio 

Some investors become overly exposed to a single industry, or even a single company over time. This can be viewed as a proverbial “good problem to have,” but presents very real questions about how to avoid risk concentration and maintain a properly diversified portfolio.  

For high earners in fast-growing fields such as technology or healthcare, successful entrepreneurs, or people inheriting assets, overconcentration in a single sector poses substantial financial risk—which ProShares Ex-Sector ETFs can help offset. 

Consider, for example, a tech worker whose current income and investments are heavily tied to the sector in which they work. Given that their paycheck (and, possibly, significant stock options) may be connected to a single company, they might want to avoid additional exposure to that sector entirely. Or, consider an executive in an industry like banking, where corporate profits, compensation, and stock performance are often closely tied to fluctuations in interest rates. That executive may seek to have a diversified investment portfolio, but want to avoid adding additional exposure to the financial sector. 

Such examples aren’t hypothetical. Consider the turmoil in the banking sector during 2023, which caught many investors off-guard. As interest rates spiked in response to inflation, companies in the Financials sector suffered outsize losses and multiple regional banks failed. By avoiding overconcentration in their investment portfolio, a financial industry professional could have better shielded their finances from both equity market declines and company-specific risk during that time.  

* S&P 500 Financials Sector data represented by S&P 500 Financials Sector GICS level 1 Index. Index returns are for illustrative purposes only and do not represent actual fund performance. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. 

Ex-Sectors ETFs can help these investors tailor their core stock exposure by delivering access to the S&P 500, minus the sector in which they have outsized exposure through their chosen career. 

As the chart below illustrates, the average American between 45 to 54 years old has a stream of income until retirement from their chosen field that is probaly significantly more valuable than the current value of their investment portfolio—and that is worth protecting through greater diversification. This is particularly true for high salary earners, who are potentially even more exposed to the booms and busts of the sector in which they work. 

Source: Present value of future wages assuming 5% interest rate: Bureau of Labor Statistics, non-seasonally adjusted median usual weekly earnings as of Q1 2024. Median value of household financial assets: U.S. Census Bureau, 2022 Survey of Income and Program Participation.

The Ex-Sectors ETF Solution 

ProShares Ex-Sector ETFs provide a compelling tool designed to strategically exclude a specific sector—technology, health care, financials, or energy—from the S&P 500 portion of an investor’s portfolio. While an investor might consider using an Ex-Sector ETF to stake a bearish position, you may seek this type of exposure for the exact opposite reason: To diversify an already concentrated stake in the industry, by virtue of career path, stock options, inheritance—or any combination of the preceding. 

Staying invested for the long-term and diversification are commonly accepted portfolio principals. Explore how Ex-Sector ETFs can be applied in a portfolio, tailored to your distinct risks and investing goals.