Investors can diversify their portfolios with exchange traded funds that target natural resources to diminish potential volatility associated with any single market sector or area.

On the recent webcast, Riding the Falls in a Barrel: Mixing Oil and Water in a Portfolio, Mark D. Carlson, Senior Investment Strategist for Northern Trust Asset Management, explains how allocations to energy and water resources can help an investment portfolio by providing an intermediate to long-term hedge against inflation, capital appreciation through growth and income generation through dividends.

In the current environment, market observers have been focusing on the swings in the oil market. Carlson points out that while prices are depressed, American producers are still pumping out more oil.

For instance, a state-mandated time limit on drilling and major oil-tax incentive in North Dakota’s Bakken oil could fuel a production spike in the region.  Meanwhile, oil demand remains relatively flat after seeing an average one-and-a-half percent growth rate from 1995 through the end of 2013.

“We believe investors seeking a long-term, strategic allocation to energy would be wise to consider alternatives to concentrated energy exposure,” Mark D. Carlson, CFA Senior Investment Strategist FlexShares ETFs, said in a research note. “Many of the investment benefits of energy may be achievable through investing in a diversified selection of natural resources equities, which could provide reasonably correlated returns to energy price movements while potentially limiting return volatility. Balanced exposure to natural resources can provide all the energy-related exposure investors normally require in their portfolios.”

Investors and advisors who want exposure in the energy sector but are wary about further volatility can utilize a diversified natural resource ETF to capture a broad group of resource companies.