If you already have broad exposure through SPY (large-cap U.S.) and QQQ (large-cap growth/tech), I'd think about diversification along factors, market caps, international exposure, and return drivers, rather than simply adding more ETFs that own the same stocks in different proportions.
Here's how I'd break it down.
Factor ETFs worth understanding
Academic research has identified several factors that have historically generated excess returns over long periods, though they can underperform for years at a time.
| Factor | Why own it | Example ETFs |
|---|
| Value | Historically outperforms over long horizons, especially after expensive growth periods | Avantis U.S. Large Cap Value ETF, Vanguard Value ETF |
| Small Cap Value | One of the strongest long-term factor premiums, but very volatile | Avantis U.S. Small Cap Value ETF, Dimensional US Small Cap Value ETF |
| Quality | Companies with high profitability and strong balance sheets | iShares MSCI USA Quality Factor ETF |
| Momentum | Stocks that have been outperforming often continue to do so | iShares MSCI USA Momentum Factor ETF |
| Minimum Volatility | Lower drawdowns, often attractive near retirement | iShares MSCI USA Min Vol Factor ETF |
Personally, if I were adding one factor today, I'd probably lean toward small-cap value because it's one of the few areas that's genuinely different from SPY and QQQ rather than another flavor of mega-cap tech.
International diversification
Many U.S. investors are much more concentrated than they realize.
Useful additions include:
- Vanguard Total International Stock ETF
- iShares Core MSCI Total International Stock ETF
- Avantis International Small Cap Value ETF (if you like factor investing)
Other asset classes
If the goal is smoother returns rather than simply "more stocks," consider assets that behave differently:
- Treasury bonds
- TIPS
- REITs
- Commodities
- Gold
For example:
- Vanguard Real Estate ETF
- SPDR Gold Shares
Thematic ETFs: be selective
Themes are fun, but many launch after a trend has already become popular.
Examples include:
- AI
- Robotics
- Cybersecurity
- Clean energy
- Semiconductors
- Space
- Genomics
These can produce spectacular periods of outperformance—and equally spectacular underperformance.
If you're interested in a theme, I'd generally keep it to perhaps 5–10% of an overall portfolio rather than making it a core holding.
One exception is semiconductors, since they represent a fundamental technology rather than a narrow story, though they're still cyclical.
Active vs. passive: where active may add value
This is where my view becomes more nuanced.
I generally prefer passive for:
- Large-cap U.S.
- S&P 500 exposure
- Total U.S. market
- Developed international
These markets are highly efficient, making it difficult for active managers to consistently outperform after fees.
Active can make more sense in:
Small caps
Information is less widely available and analyst coverage is thinner.
International markets
Especially emerging markets and certain frontier markets.
Credit
Bond managers may have opportunities through security selection and managing duration or credit risk.
Private markets
Though these come with different risks, costs, and liquidity constraints.
I generally don't think active is worth paying for in:
- Large-cap growth
- Mega-cap technology
- S&P 500 core exposure
The hurdle imposed by fees is simply very high.
If I were building beyond SPY + QQQ
A balanced expansion might look conceptually like:
- Core U.S.: SPY or a total-market ETF
- Growth: QQQ (if you want the tilt)
- Small-cap value: AVUV
- International: VXUS
- Quality factor: QUAL
- Bonds: intermediate Treasuries or aggregate bonds
- Optional: a small satellite (5–10%) in a theme you strongly believe in, such as semiconductors or cybersecurity
One thing I'd also point out is that SPY and QQQ overlap more than many investors expect. The largest holdings—companies like Apple, Microsoft, Nvidia, Amazon, Meta, and Alphabet—make up significant portions of both funds. If you continue adding growth-oriented or tech-heavy ETFs, you may increase concentration rather than diversification.
A useful exercise before adding any ETF is to ask, "What risk am I adding that I don't already own?" If the answer is "more of the same mega-cap growth exposure," it may not improve diversification much. Factors like small-cap value, quality, or international exposure tend to change the portfolio's risk profile more meaningfully than adding another technology-focused fund.
