Most investors understand the role portfolio diversification plays in minimizing risk. Unfortunately, many people think diversification simply means investing in exchange-traded funds that hold a number of different stocks.
Owning shares of a diversified U.S. equities ETF such as the SPDR S&P 500 ETF Trust(NYSEARCA:SPY) is certainly a more diversified strategy than owning a handful of individual stocks. However, investors seeking truediversification should look outside of only large-cap U.S. equities.
From March 1, 2008, to March 1, 2009, the SPY ETF dropped 44.6%. Even exposure to 500 different stocks doesn’t provide diversification when the entire stock market tanks.
Instead, investors should remember that true diversification involves investing in assets that have zero price correlation. Here’s a look at three liquid ETFs that fit that description.
ETFs For Portfolio Diversification: iShares Barclay’s TIPS Bond Fund (ETF) (TIP)
Expenses: 0.2%, or $20 per $10,000 invested annually
Not surprisingly, the majority of the major ETFs that have near-zero correlation to the S&P 500 are
bond ETFs. Out of this group, the iShares Barclays TIPS Bond Fund (ETF) (NYSEARCA:TIP) has the highest daily trading volume at more than 1.5 million. With more than $21.3 billion in total assets and plenty of daily volume, the TIP ETF should be easy for investors to buy or sell at a moment’s notice.
“TIPS” is an acronym for “Treasury inflation-protected securities.” Not only can these U.S. government-issued bonds protect against stock market volatility, they are also designed to protect against inflation.
In other words, TIPS produce…
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