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 Quote) and a 2% weight in iShares S&P Global Material Index Fund (MXI Quote).

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 Quote) and Rio Tinto (RTP Quote).

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 Quote). 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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At the time of publication, clients of Nusbaum were long DNH, DBR, IYW, IGW, FDN, RGI, PHO, GLD, MXI, VOX and BOE, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.





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