Diversifying Through ETFs

The materials sector is usually a good place to add foreign exposure and assets that have a low correlation to the market. In pursuit of these goals, the client's portfolio has a 3% weight in the streetTRACKS Gold Trust (GLD) and a 2% weight in iShares S&P Global Material Index Fund (MXI).

According to PortfolioScience.com, GLD has a -0.12 correlation to the S&P 500, while MXI has a 0.34 correlation. MXI has heavy exposure to large-cap diversified mining companies like BHP Billiton, Anglo American (AAUK) and Rio Tinto (RTP).

Utilities

In the utility sector, I prefer a common stock with a 4% weight for its yield over any ETF. This sector is a way to add yield and reduce volatility, and an individual stock often captures this better than a fund.

One last holding to round out the portfolio is a 4% weight in the Blackrock Global Opportunities Equity Trust (BOE). This is a closed-end fund that buys foreign stocks and sells options in an attempt to offer high yield and capital appreciation with less volatility than the overall market. BOE yields 8.4% and trades at a 1.8% premium to NAV.

The portfolio yields about 2.5%, although dividend information is not available for every fund because some of them are so new. It has a 0.77 correlation to the S&P 500, a beta of 0.64 and a cash position just under 10%, which, after such a big move up for the market, seems prudent. The portfolio is intentionally light on emerging markets as a function of tolerance for volatility.

The point of this is to show how mixing different types of products can create what is hopefully a diversified portfolio. This particular portfolio is probably not ideal for you, but the willingness to explore different themes and different products probably is.

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