Market Exposure

Market exposure refers to the dollar amount of funds, or percentage of a portfolio, invested in a particular type of security, market sector or industry, which is usually expressed as a percentage of total portfolio holdings. Market exposure, also known as exposure, represents the amount an investor can lose from the risks unique to a particular investment.

Market exposure describes the division of assets within a particular investment portfolio. It can be separated based on a variety of factors that allows an investor to mitigate the risks involved in certain investments. The greater the market exposure, the greater the market risk in that specific investment area.

Investments can be examined based on the type of investment involved. For example, a portfolio can consist of 20% bonds and 80% stocks. In regards to market exposure, the investor’s market exposure to stocks is 80%. This investor stands to lose or gain more depending on how stocks perform than from how bonds perform.

When examining the market exposure in a portfolio, an investor can examine his holdings by location. This can include separating domestic investments from those of foreign markets or further dividing foreign markets by their specific region. For example, an investor may have a portfolio that is 50% domestic and 50% foreign. If additional separation is desired, the foreign holdings may be divided further to show 30% in Asian markets and 20% in European markets.

Within the investor’s 80% market exposure to stocks, there might be a 30% market exposure to the health care sector, 25% exposure to the technology sector, 20% to the financial services sector, 15% to the defense sector and 10% to the energy sector. The portfolio’s returns are more influenced by health care stocks than by energy stocks because of the greater market exposure to the former.

The exposure of a portfolio to particular securities/markets/sectors must be considered when determining a portfolio’s asset allocation since it can greatly increase returns and/or minimize losses. For example, a portfolio with both stock and bond holdings that includes market exposure to both types of assets typically has less risk than a portfolio with exposure only to stocks. In other words, diversification reduces market exposure risks.

Using the aforementioned example, if the investor wanted to reduce high market exposure to health care because of major changes in the industry brought by new federal legislation, selling 50% of those holdings reduces exposure to 15%.