Are You Really Diversified?


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Most investors think they're diversified.  They own stocks and bonds.  In the stock portfolio, they don't have too much of any one industry.  They buy mutual funds that own lots of different stocks.  They have large-cap, small -caps, mid-caps, either in indivdual stocks or with mutual funds. (Cap is short for capitalization....a number derived when you multiply the price of a stock times the number of gives the Market Cap of a stock....large-cap stocks are over $10 billion, mid- cap stocks are between $1 and $10 billion, small-cap are under $1 billion...there's even a micro cap group, under $100 million),

Their income portfolio is "laddered".  That means they own some CD's or treasury bills that mature in 3 months to 1 year.  They own some corporates or treasuries that mature in 3 years, 5 years, and 10 years.  The yields aren't much but the strategy protects their capital (as long as they stay with investment grade bonds or put less than $250,000 in an FDIC insured bank or S&L). 

Investors with this group of investments usually feel pretty good about their portfolios and themselves.  They've done what all the books tell them to do.  The only problem is that this strategy, over the last 10 years, hasn't given them any return.  And those years in 2008 and 2009, were too painful to think about, especially in the stock portfolio.  Investors' main problem: they didn't really diversify.

Now they can.  Today, diversity is better and easier than ever.  Investors can buy into asset classes that previously weren't available, or they required such large sums that only the wealthiest or institutions could participate.  Now investors have ETFs (Exchange Traded Funds) and diversification in a portfolio is truly attainable.

Think about various asset classes: U.S. stocks and bonds, developed countries stocks and bonds, emerging markets stocks and bonds, foreign exchange, gold, silver, platinum, industrial metals, Asian real estate.  The list is almost endless.  So are the ETFs investors can buy to have these asset classes in their portfolios.

Here are a few examples: The SPDR Dow Jones International Real Estate ETF (RWX).  It tracks the Dow Jones Global ex-U.S. Real Estate Securities Index, which is a float adjusted market capitalization benchmark designed to measure the performance of publicly traded real estate securities in developed and emerging countries excluding the United States.   By following this benchmark, RWX ends up with a portfolio of roughly 131 securities with heavy exposure to developed economies along the Pacific Rim such as Australia and Japan. The two aforementioned countries make up close to 39% of total assets while double digit weightings are also afforded to the United Kingdom, Hong Kong, and Canada as well. In terms of sectors, Real Estate Operating Companies dominate with close to one-third of total assets, but are closely trailed by diversified real estate operators (24%) and regional malls (15%). The yield on RWX is  5.3%  on an annual basis.

If investors want to hold gold:  SPDR Gold Trust ( GLD ) was the very first Gold ETF fund and still the most popular. It purchases 400 ounce gold bars from London Good Delivery Bars, and issue the shares at one tenth of the price of an ounce of the gold.

Market Vectors Gold Miners fund (GDX) attempts to mirror the NYSE Arca Gold Miners Index as closely as possible, before any fees are removed from the investment. Using index investing, your portfolio will have 32 mining companies behind it.  Keep in mind, this type of Gold ETF is made of up gold company stocks, thus it tracks the gold stock index, not the gold price index.

There is almost no end to the number of ETFs an investor can use to truly diversify.  For more information on ETFs, please see the ETF Web site:

- Ted Allrich
January 17, 2012

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , ETFs
Referenced Stocks: GDX , GLD , RWX

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Ted Allrich

Ted Allrich

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