Key Takeaways:

• Mega-cap companies now drive much of sector performance, often across multiple industries.
• Regulatory diversification rules can limit how closely some ETFs track sector leaders.
• VanEck’s TruSector ETFs offer a new approach for achieving more precise, market-cap-aligned exposure.

Rethinking Sector Exposure: Why Traditional ETFs Struggle to Capture Today’s Market Leaders

The U.S. equity landscape has evolved dramatically over the past decade. Market leadership has become increasingly concentrated in a small group of mega-cap companies whose influence extends across multiple sectors. Yet, many investors may not realize that the sector ETFs they use to gain targeted exposure often fail to fully capture these dominant names.

This isn’t a flaw in index design; it’s a consequence of regulatory constraints baked into the very structure of U.S. exchange-traded funds. Understanding these limitations, and how to overcome them, has become essential for asset allocators seeking precision in their portfolio construction.

The Hidden Limits of Sector ETFs

Most investors assume that when they buy a sector ETF — say, a technology or consumer discretionary fund — they’re getting exposure that closely mirrors the S&P 500 sector indexes. But in reality that may not be the case.

Because most ETFs are structured as Registered Investment Companies (RICs) under the Investment Company Act of 1940, they must adhere to diversification rules that cap position sizes. These rules are designed to protect investors from concentration risk, but they also introduce a structural limitation:

• No single company can exceed 25% of a fund’s assets.
• The sum of all positions over 5% each cannot exceed 50% of the fund.

In practice, this means that when a few companies dominate a sector, think Apple and Microsoft in Technology, or Amazon and Tesla in Consumer Discretionary, traditional sector ETFs are forced to underweight these mega-caps and overweight smaller companies to stay compliant.

The result is a mismatch between what investors think they own and what they may actually hold.

A Growing Mismatch in Market Exposure

This diversification issue isn’t confined to one or two industries, it’s pervasive. According to VanEck’s research, seven of the eleven GICS sectors in the U.S. large-cap universe currently exhibit significant concentration at the top.

Technology and Consumer Discretionary sectors, for example, are dominated by just a handful of household names. As these companies continue to drive market performance, the gap between market-cap-weighted benchmarks and RIC-constrained ETFs only widens.

For investors aiming to express precise sector views or match benchmark performance, these gaps can meaningfully distort outcomes — especially in portfolios that rely on sector rotation, tactical tilts, or benchmark replication.

How Allocators Have Tried to Compensate

Many advisors and portfolio managers are acutely aware of this issue. In conversations with allocators, VanEck has heard a variety of workarounds designed to “patch” the problem, each with trade-offs.

Some investors have tried doubling up on multiple ETFs with overlapping exposures to push their aggregate weighting in mega-cap names closer to full market capitalization levels. Others have layered in equal-weight or alternative index products that include the same large-cap leaders in different proportions.

While creative, these solutions introduce complexity and inefficiency. They can result in unintended concentration or dilution, overweighting both the very largest and very smallest companies — ultimately blurring the intended sector exposure even further.

Introducing VanEck TruSector ETFs

Recognizing this challenge, VanEck developed the TruSector ETF suite — a lineup of sector ETFs designed to provide investors with true market-cap exposure while remaining fully RIC-compliant.

At its core, the TruSector approach is built around a hybrid structure that blends direct stock holdings with positions in underlying ETFs. This innovation enables the funds to replicate the economic exposure of an uncapped benchmark without breaching diversification limits.

Here’s how it works:

1. Direct Equity Exposure: Each TruSector ETF directly holds stocks from its target sector — up to the maximum allowed by RIC rules (no more than 25% in any one company, and no more than 50% total across names above 5%).
2. Supplemental ETF Exposure: Once those caps are reached, the fund allocates the remaining exposure through other sector ETFs that already hold those same mega-cap names.

Because the diversification rules apply at the fund level, the additional exposure obtained indirectly through other ETFs doesn’t count toward the 25%/50% issuer limits. Avoiding the look-through treatment down to the stocks in the ETF holding, allows the fund to achieve truer exposure while staying fully RIC compliant.

The result is a structure that mirrors an uncapped, market-cap-weighted benchmark — capturing today’s true sector leaders in proportion to their real market influence.

Current Focus and Sector Coverage

While VanEck has filed for all eleven GICS sectors, the firm’s initial focus has been on those representing the largest share of the U.S. large-cap universe and the areas where concentration is most acute and investor demand is highest.

Both are listed on Nasdaq and represent sectors where traditional ETFs have the largest deviations from benchmark weights.

Additional TruSector ETFs targeting Financials, Communications Services, Healthcare, Industrials, and Consumer Staples are expected to follow. Together, these sectors account for the majority of U.S. large-cap market capitalization and are where precision exposure matters most to allocators.

Who Benefits from TruSector ETFs

The TruSector design aims to serve institutional and professional investors who demand benchmark accuracy without operational complexity. Key use cases include:

• Asset managers looking to fine-tune weights in sector-focused portfolios with closer alignment to their target performance benchmarks.
• ETF model portfolio providers who need precise tracking to optimize rebalancing and avoiding excess overlap caused by holding similar ETFs to get to desired stock weights.
• Portfolio managers seeking to express active sector views without distorting exposure.
• Advisors and individual investors who want a cleaner, more intuitive way to access true market-cap-weighted sector performance when expressing a bullish view on a certain sector.

By restoring alignment between investor expectations and actual exposure, TruSector ETFs can serve as better building blocks for today’s sector-focused portfolios.

Why Precision Matters More Than Ever

In today’s market, a small handful of companies account for an outsized share of index returns. For example, the top 10 stocks in the S&P 500 represent nearly one-third of its total market capitalization, a level of concentration not seen in decades.

For sector-based investing, this dynamic is even more pronounced. When a few firms drive most of the gains, missing or underweighting those names can significantly skew performance.

Traditional sector ETFs, seeking to track indexes designed around RIC limits, effectively force investors to take on unintended active share risk, deviating from the original uncapped benchmarks previously had been very similar to. Over time, that risk compounds, leading to tracking error, unexpected returns, and misaligned exposures.

By solving this structural mismatch, TruSector ETFs give investors the ability to capture the market as it truly is — not as regulation distorts it.

A Simpler Path to True Market-Cap Exposure

VanEck’s TruSector ETFs reflect a broader shift in ETF innovation — from broad-based access products to precision tools designed to solve specific portfolio challenges.

Rather than reinventing the wheel, the TruSector structure works within existing regulatory frameworks to deliver a cleaner outcome. It doesn’t rely on leverage, derivatives, or exotic exposures. Instead, it leverages the ETF ecosystem itself to efficiently achieve full market capitalization weights while staying compliant.

For investors and advisors striving for transparency, alignment, and simplicity, this represents a meaningful step forward.

Sector ETFs have long been foundational tools for asset allocators — but as markets evolve, so must the tools themselves. The concentration of market leadership among a few mega-cap names has exposed a hidden flaw in traditional sector ETFs: they can’t always give investors what they think they’re buying.

VanEck’s TruSector ETFs address this challenge head-on, offering a practical and compliant way to capture the true shape of today’s market.

In an environment where precision is performance, the ability to align exposures with reality — not regulation — may prove to be one of the most important advantages investors can have.

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