Investment circles typically fall within two camps of equally vehement supporters: those who advocate for concentrated investing and those who advocate for diversified investing. In the simplest terms, the two investment types are characterized by portfolio size, with concentrated portfolios typically containing fewer than 30 holdings whereas diversified portfolios often contain hundreds. While both methods can find a place in any investment strategy, we’re here to make the case for diversified concentration.

Benefit #1: Matched Volatility

Comparing concentrated investing to diversified investing is a bit misleading because concentrated investment portfolios often are, and have to be, diversified. One of the biggest fallacies that pits large “diversified” portfolios against concentrated portfolios is their perceived levels of risk, or volatility. But in fact, the Law of Diminishing Returns has been applied to this very concept¹, finding that concentrated portfolios of 20 to 25 stocks are exposed to the same level of volatility as portfolios of 100 or more stocks. Another study² found that when investors were asked to create funds made up of their top 25 preferred stocks, they had roughly the same level of volatility as their diversified index funds. In fact, concentrated portfolios of the top 30 preferred stocks were actually found to be less volatile than their diversified index funds, proving that larger portfolios are not always safer.

Benefit #2: Potential for Outperformance

Depending on an investor’s goals, we believe the greatest case for concentrated investing lies in its potential to outperform the market and its diversified benchmark indices. Even for funds with as few as 5 holdings, the more concentrated a portfolio, the higher its total returns can be. The same aforementioned study² that found comparable volatility also found that when investors formed portfolios of their top five preferred stocks, those funds produced 10.77% total return compared to a total return of just 5.05% for its highly diversified benchmark index fund. Concentrated portfolios of the top 30 preferred stocks still outperformed their diversified indices by an average of 1.97%².

Benefit 3: Informed Decision-Making

Investors with hundreds of holdings in their portfolio cannot possibly know enough about each company to make an educated guess regarding its growth potential or vulnerability to specific shocks. We believe managers with concentrated portfolios are better equipped to respond to geopolitical events, significant legislative reforms, or technological developments that might impact each individual holding one way or another. The intrinsic value³ of each company can be taken into account, which is essential for evaluating forward-looking, long-term growth to help them cut through the noise of short-term stock valuations or the seduction of trending stocks. Being able to conduct in-depth fundamental research into each company in a concentrated portfolio is the best way to optimize diversification as the key to mitigating real risk and realizing capital appreciation. We believe it’s this level of understanding that makes concentrated investing superior to its diversified counterpart.

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TrueShares Technology, AI & Deep Learning ETF (LRNZ) seeks to provide thematic exposure to a concentrated portfolio of 20-30 technology companies that are significantly involved in the application of advanced levels of artificial intelligence within their businesses. A focus on secular growth companies helps lower correlation to benchmarks like the tech-driven S&P 500 and the tech-heavy Nasdaq. For diversification within a concentrated portfolio, LRNZ has holdings across industries, including semiconductors, data storage, cloud computing, cybersecurity, and biotech.

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Sources:

1. https://intrinsicinvesting.com/2016/12/01/excessive-diversification-is-pointless-damages-returns/
2. https://www.uts.edu.au/sites/default/files/wp18.pdf
3. https://www.cannonfinancial.com/uploads/main/9725_insights-on-how-to-manage-a-concentrated-portfolio.pdf

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Definitions

S&P 500: The S&P 500 (Standard & Poor's 500) is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States.

Nasdaq: The Nasdaq Composite is a stock market index composed of thousands of stocks listed on the Nasdaq Stock Market, with a particular emphasis on technology-related companies.

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Disclosures

Diversification does not eliminate the risk of experiencing investment loss.

Concentration Risk. The Fund concentrates its investments in one or more industries within the Information Technology Sector and, as of March 31, 2026, the Fund’s investments were concentrated in the Software Industry.

Software Industry Risk. Computer software companies can be significantly affected by competitive pressures, aggressive pricing, technological developments, changing domestic demand, the ability to attract and retain skilled employees and availability and price of components. The market for products produced by computer software companies is characterized by rapidly changing technology, rapid product obsolescence, cyclical market patterns, evolving industry standards and frequent new product introductions. The success of computer software companies depends in substantial part on the timely and successful introduction of new products and the ability to service such products. An unexpected change in one or more of the technologies affecting an issuer’s products or in the market for products based on a particular technology could have a material adverse effect on a participant’s operating results. Many computer software companies rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by computer software companies to protect their proprietary rights will be adequate to prevent misappropriation of their technology or that competitors will not independently develop technologies that are substantially equivalent or superior to such companies’ technology.