When overweighting a specific sector, exchange traded fund investors should monitor their underlying holdings or risk becoming overexposed to a single company stock.

Most ETFs try to reflect the performance of an underlying index, and many benchmarks are market capitalization-weighted, so the largest companies make up the largest weights.

While many broad index ETFs diversify risk through hundreds if not thousands of equity holdings, specialized ETFs that invest in certain segments or market sectors may not have the same level of diversified risk, writes Ben Carlson on Yahoo! Finance.

For instance, investors who are taking a look at the energy sector after the recent sell-off may be monitoring something like the Energy Select Sector SPDR (NYSEArca: XLE). However, with just 46 holdings, the energy ETF is very top heavy. Specifically, XLE includes a 16.8% tilt toward Exxon Mobil (NYSE: XOM) and 13.4% Chevron (NYSE: CVX), and the fund’s top ten holdings make up 61.5% of the overall portfolio. [Contrarian ETFs to Capitalize on Year-End Tax Selling]

The other market capitalization-weighted sector ETFs also show similar top-heavy tilts. For instance, the top ten component holdings make up 44.4% of Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), 64.0% of Consumer Staples Select Sector SPDR (NYSEArca: XLP), 49.4% of Financial Select Sector SPDR (NYSEArca: XLF), 53.9% of Health Care Select Sector SPDR (NYSEArca: XLV), 46.9% of Industrial Select Sector SPDR (NYSEArca: XLI), 64.9% of Materials Select Sector SPDR (NYSEArca: XLB), 57.9% of Technology Select Sector SPDR (NYSEArca: XLK) and 59.1% of Utilities Select Sector SPDR (NYSEArca: XLU).

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