Even as sectors become more correlated to one another, and S&P 500 sectors display more similarity with the S&P 500 Index, the concept of diversification still holds importance. Paul Kaplan of Morningstar wrote that it is a myth that diversification failed to work during 2008 Global Financial Crisis. [An ETF Trend Following Plan for All Seasons]
During that year, the S&P 500 lost 37% and small-cap stocks lost roughly the same amount while developed international stocks lost 43%, emerging markets lost 53% so it seemed as though diversification failed. However, long-term government bonds gained 26% and a 60/40 stock bond portfolio lost only 12% and gained 10% the following year. Gold had positive returns in both 2008 and 2009.
Furthermore, as some critics like to blame ETFs to be the root to part of this problem, they are also part of a solution. Rawson says that trading ETFs ultimately involves trading baskets of stocks in the same direction, which could push stock correlations higher. [The Highs and Lows of ETF Investing]
Tisha Guerrero contributed to this article.