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Wednesday, July 1, 2009

Diversify By Investing With Non-Correlating ETFs

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.

Disclosure I am long SPY,IJT,DJP and EEM.

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