Diversifying Through ETFs

I've written about many exchange-traded funds, and I thought it would be worthwhile to see how these ETFs coordinate to create the equity portion of a diversified portfolio, or at least my idea of one. The following is an actual account, recently implemented, that shows a blend of ETFs, common stocks and even a closed-end fund.

I'm not a fan of all-ETF portfolios, but I'm a big believer in using the best tool to capture a given effect. For some people, the best tool might be an ETF, and for others, it might be a stock. The following represents one person's best way to capture a diversified portfolio. For purposes of this article, I'll go sector by sector, but focus on the funds.

Financial

In the financial sector, the client has 3% in a domestic large-cap bank stock, 3% in an Irish bank stock and 9% in the WisdomTree Pacific ex-Japan High-Yielding Equity Fund (DNH), which I wrote about a few months ago. It's less volatile than the S&P 500 and has a 6% yield.

DNH has 87% of its assets in Australia, which is known for mining, but 50% of the fund is in Australian bank stocks. The chart shows that DNH is really a proxy for Australian financials, as it correlates almost exactly with National Australia Bank (NAB) and much less so with BHP Billiton (BHP). Therefore, its total weight in the banking sector is 15%, compared to 21% for the S&P 500.