In the midst of a global market recovery and rally, the materials sector and its exchange traded funds (ETFs) have performed remarkably well. But how do you make sure that you don’t overexpose your portfolio to this one sector?
The best way to prevent overexposure is to remain educated and know exactly what your portfolio holdings contain. For example, investing heavily in both emerging markets and the materials sector could be potentially risky in that the two areas could be nearly perfectly correlated, states Gary Gordon of ETF Expert. The iShares MSCI Brazil Index (EWZ) and the iShares S&P Global Materials Sector Index Fund (MXI) move in tandem, and an investment in both could potentially give you double the exposure to the same sector.
One thing in general to keep in mind is that when you’re gaining exposure to emerging markets, you could very well be gaining exposure to basic materials suppliers. Even the iShares FTSE/Xinhua China 25 Index Fund (FXI) performance mimics that of MXI.
On the hunt for non-correlating assets? Check out SPDR’s amazing Correlation Tracker.
Diversification, having a strategy and knowing what is under the hood of each of your holdings will prevent your portfolio from doubling or even tripling your exposure to a certain sector, unless that is what your investment goal is.
For more stories on basic materials, vistit our basic materials category.
Kevin Grewal 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.