One of the key principles guiding portfolio managers today is that different asset classes have historically behaved in consistent ways depending on the economic cycle.
For instance, stocks tend to do well during periods of economic expansion and low interest rates. On the other hand, during major recessions or market crashes, investors often see a “flight to safety” to low-risk assets like U.S. Treasury bonds. Lastly, when inflation strikes, as it did in 2022, commodities like crude oil and the stocks of energy producers tend to surge.
The takeaway is that the performance of these assets is not perfectly correlated — when some zig, others zag. While one asset may be underperforming, another may be outperforming.
[Sign up for stock news with our Invested newsletter.]
“For instance, combining stocks and higher-quality investment-grade bonds is much more likely to achieve a higher level of diversification,” says David James, managing director and advisor at Coastal Bridge Advisors. “When stocks go down in value, high-quality bonds often produce positive returns — this is a very basic example of how to build real diversification.”
By combining them in various proportions and periodically rebalancing, you can end up with a portfolio that produces a competitive return while taking on less risk.
“Different asset classes provide vastly different return profiles during distinct macroeconomic and market environments,” says Michelle Cluver, head of ETF model portfolios at Global X ETFs. “For example, equities and fixed income traditionally have a low correlation, so fixed income can provide a cushion during periods of economic stress where equities are likely to face headwinds.”
An easy way to access all these asset classes — stocks, bonds, commodities, even cryptocurrency, real estate and cash — is via exchange-traded funds (ETFs). These instruments trade like stocks but offer unparalleled flexibility to track a variety of underlying assets while being highly liquid and affordable.
Here are 10 ETFs investors can buy to build a diversified portfolio:
| ETF | Expense ratio |
| iShares Core Aggressive Allocation ETF (ticker: AOA) | 0.15% |
| SPDR Portfolio MSCI Global Stock Market ETF (SPGM) | 0.09% |
| Vanguard Total World Bond ETF (BNDW) | 0.05% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% |
| abrdn Physical Gold Shares ETF (SGOL) | 0.17% |
| iShares Global Energy ETF (IXC) | 0.44% |
| Invesco S&P 500 Equal Weight ETF (RSP) | 0.20% |
| Schwab U.S. REIT ETF (SCHH) | 0.07% |
| KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) | 0.90% |
| WisdomTree U.S. Efficient Core Fund (NTSX) | 0.20% |
iShares Core Aggressive Allocation ETF (AOA)
“We believe in simplicity, especially for personal investors — we know the biggest decision made is the asset allocation decision, so having a couple of choices for each major asset class is important,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. “We also generally stick to U.S. equity, international equity and fixed income.”
Grossman’s recommendations are in line with what an “asset allocation” ETF like AOA offers. This ETF uses a “fund of funds” structure to hold various other iShares ETFs that provide 80% exposure to global equity and 20% exposure to fixed income. It charges a 0.15% net expense ratio, which is inclusive of all underlying fund fees. Periodically, iShares will rebalance this ETF back to an 80/20 allocation.
SPDR Portfolio MSCI Global Stock Market ETF (SPGM)
Some investors may find AOA’s 80% stock allocation too high for their risk tolerance. Other investors may find the 20% in bonds too conservative. For greater customization, investors can hold the stock and bond components of their portfolio separately. For low-cost global equity exposure, a great ETF to consider is SPGM, which tracks the popular MSCI ACWI IMI Index.
This benchmark currently provides exposure to over 2,500 market-cap-weighted value and growth stocks from all 11 sectors, spanning U.S., international developed and emerging markets. According to SPDR, this benchmark tracked by SPGM covers approximately 99% of all investable global equities. As part of SPDR’s low-cost “Portfolio” lineup of ETFs, SPGM charges an affordable 0.09% expense ratio.
Vanguard Total World Bond ETF (BNDW)
“There are now enough bond ETFs that investors can add for even further diversification,” says Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates. “For example, bond investors can tailor their fixed income allocation based on their tolerances for interest rate risk and/or credit quality.” To complement SPGM, investors can buy BNDW.
This bond ETF tracks the Bloomberg Global Aggregate Float Adjusted Composite Index by holding two other Vanguard bond ETFs tracking U.S. and international bonds. BNDW’s portfolio of over 18,000 bonds includes both government and investment-grade corporate issues of various maturities. It currently pays a 4.1% 30-day SEC yield with monthly distributions and charges a 0.05% expense ratio.
Global X 1-3 Month T-Bill ETF (CLIP)
When it comes to diversification, bond ETFs can vary wildly in terms of their perceived safety. “For example, we caution clients to be careful using long-duration Treasury ETFs to protect against periods of negative stock market returns given their heightened sensitivity to inflation pressures,” Doty says. “As we saw in 2022, the influence of inflation on long-duration bonds trumped all else.”
If you’re looking for lower-risk portfolio “ballast,” consider a Treasury bill, or T-bill, ETF like CLIP. By focusing on ultra-short-maturity, high-credit-quality government debt, CLIP provides excellent safety of principal. But because short-term rates remain elevated at present, the ETF is also paying a competitive 5.3% 30-day SEC yield with monthly distributions. CLIP charges a 0.07% expense ratio.
abrdn Physical Gold Shares ETF (SGOL)
Gold is a time-tested “safe haven” asset. Despite high volatility, its low correlation to stocks and bonds makes it a useful asset to diversify with. However, buying physical gold incurs large dealer spreads and storage inconveniences. A more liquid and affordable alternative is a gold-backed ETF like SGOL, which charges a 0.17% expense ratio and can be bought and held in most brokerage accounts.
Unlike gold miner or gold futures ETFs, SGOL’s price actually tracks the spot gold price. This is because the ETF is physically backed by actual gold bullions stored in London and Zurich vaults, which are audited and inspected twice per year, once at random. Investors can even access a list of bars with serial numbers on the ETF’s webpage, which provides a greater degree of transparency.
[Is Gold a Good Investment Right Now?]
iShares Global Energy ETF (IXC)
“We continue to believe that energy companies are an under-appreciated gem in the value space,” Grossman says. “Low oil prices have pushed their break even lower than 10 years ago, and the capital discipline acquired from going through tough markets has focused them on cash flow generation.” Should inflation rear its head again, a globally diversified energy ETF like IXC stands to benefit.
This ETF tracks the S&P Global 1200 Energy 4.5/22.5/45 Capped Index, which holds a fairly concentrated portfolio of 53 companies. The top holdings of this ETF include all five of the oil and gas “super-majors,” also known as “Big Oil.” These companies are Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Shell PLC (SHEL), BP PLC (BP) and TotalEnergies SE (TTE). IXC charges a 0.44% expense ratio.
Invesco S&P 500 Equal Weight ETF (RSP)
Market-cap-weighted indexes have one notable weakness: over-concentration in top holdings during bull markets. “For example, the ‘Magnificent 7’ accounted for 60% of the S&P 500’s return in 2023,” says Chris Dahlin, factor and core equity ETF strategist at Invesco. “As a result, the weight of the top 10 companies climbed to just over 32%, near the highest level of concentration since the late 1970s.”
To mitigate this, investors can use equal-weight ETFs like RSP. This ETF takes all the S&P 500 stocks and, at each quarterly rebalance, assigns each one a 0.2% weight irrespective of its size. Practically, this provides investors with greater exposure to mid-cap stocks, while providing a far more balanced sector concentration with less technology emphasis. RSP charges a 0.2% expense ratio.
Schwab U.S. REIT ETF (SCHH)
Real estate sector equities, including real estate investment trusts (REITs), tend to be underrepresented in most stock market benchmarks. For instance, real estate only accounts for around 2% of the S&P 500 index by weight in July 2024. Therefore, investors who wish to overweight this traditional income-generating sector can do so via REIT ETFs like SCHH, which charges a 0.07% expense ratio.
SCHH’s benchmark is the Dow Jones Equity All REIT Capped Index, which holds over 100 domestic market-cap-weighted REITs involved in the retail, residential, industrial, data center, health care, office, self-storage and hospitality industries. As expected, this ETF also has above-average income potential, with a 30-day SEC yield of 4.1% at present.
KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM)
Want to know how institutional investors like the famous Yale endowment construct portfolios? In Yale’s case, it involves a heavy allocation to alternative investments such as “absolute return strategies.” These are all-weather, hedge-fund-like investments designed to produce positive returns irrespective of market conditions, while achieving a low correlation to traditional assets like stocks and bonds.
Today, retail investors can access similar strategies via ETFs like KMLM. This alternative ETF holds a portfolio of 22 futures contracts across commodity, currency and bond markets weighted by historical volatility, while employing a quantitative trend-following model. Despite charging a high 0.9% expense ratio, KMLM has achieved a strong 10% annualized return since its inception in December 2020.
WisdomTree U.S. Efficient Core Fund (NTSX)
Advanced investors can put the principles of Modern Portfolio Theory into play with a leveraged ETF like NTSX. Essentially, this ETF takes a classic portfolio of 60% in stocks and 40% in bonds, and then applies one-and-a-half times leverage. The result is a portfolio of 90% in stocks and 60% in bonds, which historically has returned similar to a 100% stock portfolio but with less risk.
How does NTSX achieve this? First, the ETF allocates 90% of its portfolio to 500 large-cap U.S. stocks. Then, NTSX takes the remaining 10% cash and uses it as collateral for Treasury futures, which provide embedded leverage. The use of Treasury futures gives it six times notional exposure to the return of Treasury bonds for a 60% allocation. It is also fairly affordable at a 0.2% expense ratio.
More from U.S. News
8 Best Commodity ETFs for Diversification
Fund of Funds: 8 Great ETFs That Hold ETFs
7 ETFs to Hedge Against a Stock Market Crash
10 ETFs to Build a Diversified Portfolio originally appeared on usnews.com
Update 07/11/24: This story was previously published at an earlier date and has been updated with new information.
