ONEQ's Diversification Illusion: Why "All-in-One" ETFs May Fail You

In an era where investors seek simplicity, "all-in-one" ETFs like the Fidelity Nasdaq Composite Index ETF (ONEQ) promise broad exposure to the U.S. equity market. Yet beneath its deceptively broad label lies a stark reality: ONEQ's construction traps investors in a concentrated bet on technology stocks, leaving them exposed to sector-specific volatility. This article dissects how ONEQ's design falls short of true diversification and why investors must look beyond marketing buzzwords to protect their portfolios.

The Diversification Myth: Tech Dominance

ONEQ tracks the Nasdaq Composite Index, a benchmark heavily skewed toward technology and growth-oriented companies.

. While ONEQ holds over 2,000 stocks, its top 10 holdings—likely giants like Apple, Microsoft, and Amazon—account for 57% of its assets. Such concentration creates a paradox: investors buying ONEQ for "diversification" may end up with risk akin to holding a handful of tech stocks.

Compare this to the S&P 500, where technology constitutes 32% of the index (as of March 2025), or the Invesco QQQ (QQQ), which tracks the Nasdaq 100 and is even more tech-heavy. ONEQ's broader mandate offers no meaningful escape from sector risk; it simply replicates the Nasdaq Composite's inherent tilt.

Hidden Risks in Rebalancing

ONEQ's rebalancing methodology further amplifies these risks. The fund uses statistical sampling to mirror the Nasdaq Composite, which itself is rebalanced annually. This approach may fail to keep pace with rapid market shifts. For instance, during the 2025 trade tariff-induced selloff, tech stocks faced disproportionate declines. Investors in ONEQ would have seen their portfolios dragged down by the very sector they assumed was diversified.

In contrast, ETFs like the Russell 3000 Index Fund (IWV) rebalance semi-annually, allowing for more frequent adjustments to market shifts. Even the S&P 500, rebalanced quarterly, offers better flexibility. ONEQ's reliance on annual reconstitution leaves it vulnerable to prolonged overexposure to declining sectors.

The Case for Alternatives: Equal-Weighted Funds and Sector Balance

To achieve true diversification, investors should consider alternatives that spread risk more evenly. The Innovator S&P 500 Equal Weight ETF (RSP), for example, allocates the same percentage to each S&P 500 constituent, reducing tech's dominance to 20%. Similarly, sector-specific ETFs like Consumer Staples Select Sector Fund (XLP) or Financial Select Sector Fund (XLF) allow targeted allocations to less volatile sectors.

This comparison reveals how ONEQ's tech-heavy exposure led to outsized gains during growth rallies but severe drawdowns during corrections. In 2025's first quarter, ONEQ fell 9.48% as tech stocks stumbled, while RSP declined just 3.2%.

Volatile Markets Demand Vigilance

The first half of 2025 has underscored the dangers of overconcentration. Trade tariffs and rising interest rates have punished growth stocks, while value-oriented sectors like energy and utilities surged. ONEQ's lack of exposure to these areas left investors unprepared for shifting market dynamics.

Investment Advice: Scrutinize, Diversify, and Adapt

1. Avoid "All-in-One" Misnomers: ETFs like ONEQ may claim broad diversification, but their underlying indexes dictate their risk profile. Always check sector allocations and top holdings.
2. Consider Equal-Weighted Alternatives: Funds like RSP or the CRSP U.S. Total Market Equal Weight ETF (EWMC) spread risk more evenly, reducing reliance on megacaps.
3. Sector Balance Matters: Pair tech-heavy ETFs with exposure to defensive sectors (e.g., healthcare, utilities) or small-cap value funds to mitigate volatility.
4. Rebalancing Frequency: Opt for ETFs rebalanced quarterly or semi-annually to stay aligned with market realities.

Conclusion

ONEQ's concentrated tech exposure and infrequent rebalancing make it a poor proxy for true diversification. Investors chasing simplicity risk falling into the "diversification illusion"—a portfolio that looks broad but behaves like a single-sector bet. In volatile markets, success demands more than a catchy ETF name; it requires scrutiny of holdings, rebalancing mechanisms, and sector weightings. By embracing alternatives that spread risk and adapt to change, investors can build portfolios that thrive in any environment.

The lesson is clear: diversification is not a label but a deliberate strategy. In 2025's uncertain landscape, that distinction matters more than ever.