How diversified is your exchange traded fund (ETF) portfolio? No matter how well you think you have your bases covered, every portfolio is vulnerable to something, cautions Roger Nusbaum for The Street.

Many investors who invest in broad-based ETFs or actively managed mutual funds end up too heavy in the financials. Individual stocks and sector funds also tend to have the same problems. An example of the correlation between two broad-based funds can be seen in two market segments that tout increased growth and unstoppable demand.

iShares S&P Global Materials Index Fund (MXI) and the BLDRs Emerging Market 50 ADR Index (ADRE) have a tight correlation, especially in times of stressful corrections. The increased demand for natural resources in places like China and India have also triggered demand from countries with the natural resources like Brazil and Chile, according to Nusbaum.

The infrastructure buildup is still in its infancy, and needs more time and dollars to take off. Right now China is off its peak 40%, so think about what this could do for related sectors, ETFs and countries. Think about the China decline, and how easy emerging markets, and materials could go down, too. Also, remind yourself of the true total exposure to these sectors and how a decline would affect your portfolio.

The time to come up with your exit strategy is now. It’s wise to know your plan and stick to it, regardless of emotion. When a fund drops below its 200-day moving average or 8% off its high, sell it. Once you begin rationalizing your movies or hoping for a turnaround is when you get into trouble.

Tags | Asia, Chile, China, Emerging Markets, Material ETFs