Never keep all your eggs in one basket. This is a timeless adage that applies to nearly anything, not least of which are your investments and exchange traded funds (ETFs). One way to get diversification is by stocking up on non-correlating assets.
Diversification is one way to reduce risk while optimizing overall returns, and finding non-correlating assets is key to diversification, remarks Gary Gordon for ETF Expert. By reducing risk, an investor should consider a mix of low-correlating assets and some developed market funds.
Most developed markets indexes move in unison with another. Some examples include:
- S&P 500 SPDR Trust (SPY): up 5.9% year-to-date
- iShares S&P Small Cap 600 (IJT): up 7.8% year-to-date
- iShares Global 100 (IOO): up 4.6% year-to-date
- Japan’s iShares MSCI Tokusai Index (TOK): up 9.9% year-to-date
Foreign fixed income, natural resource, commodity, energy, emerging market, currency, and precious metal stocks all had smaller correlations to broad market developed stock funds. Related ETFs include:
- SPDR Lehman International Treasury Bond ETF (BWX): up 1% year-to-date
- iShares Natural Resources Fund (IGE): up 23.9% year-to-date
- iShares Dow Jones-AIG Commodity Index ETN (DJP): up 11% year-to-date
- Alerian MLP ETN (BSR): up 26.2% year-to-date
- iShares Emerging Market Fund (EEM): up 36.7% year-to-date
- Powershares Precious Metals (DBP): up 16.1% year-to-date
Finding non-correlating assets is just one piece of the overall puzzle.When looking into the broad market or specific sectors, a savvy investor should have a strategy in place. Take a look at our investing strategy to get a sense of things.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.