Yet another example of how diversification can help an exchange traded fund (ETF) portfolio from getting hit rather than completely drained is evidenced in the transportation sector.

Diversification across an economic segment lessened the negative impact on portfolios by taking the route of a broad sector ETF instead of the narrow sub-segment of a sector, says Gary Gordon for ETF Expert.

For instance, the Dow Jones Transportation Fund (IYT) represents a cross-section of the transportation sector, including railroads, trucking and air transportation. The fund paralleled the S&P 500 over the last three months.

In contrast, sub-segments of the sector such as shipping, represented by Claymore Global Shipping Fund (SEA), was hit especially hard by the downturn.

SEA sank as much as 50% within a few months, proving that a narrow focus can hit portfolios hard when there is crash or collapse. Of course, the flip side of that is that in an upturn, these funds can reflect a sub-sector’s strong performance.

IYT is down 17.6% year-to-date, while SEA is down 55% since its Sept. 8 inception.

These types of funds can be useful during a bull market and are handy for those aggressive investor types. Make sure that you know the risks and that you’re comfortable with the outcome, and that you have an exit strategy in place.

Tags: IYT, S&P 500, SEA, Sector ETFs, Transportation