The majority of investors intuitively understand diversification. 

After all, few would risk their retirement savings or whole investment portfolio on a single stock. Consider the recent example of the wipeout of Silicon Valley Bank shareholders.

However, what exactly does diversification comprise, and how do investors construct diversified portfolios?

Diversification implies putting your eggs in multiple baskets for the general public. It’s an investing approach that mixes asset classes, financial instruments, and investment kinds to optimize long-term returns and minimize risk and volatility. Similarly, asset management is equally important.

Michelle Cluver, vice president and portfolio strategist at Global X ETFs, explains with an example that equities and fixed income have a historically low correlation. Thus, fixed income acts as a buffer during times of economic stress when equities are likely to face headwinds.

Diversifying The Portfolio

Diversifying a portfolio refers to the practice of spreading your investments across various asset classes and sectors to reduce risk and maximize returns.

For portfolio diversification, invest in a mix of stocks, bonds, real estate, commodities, ETFs (exchange-traded funds), and other alternative investments like tokenized equity if you know what makes crypto go up and down. There are various sectors, such as technology, healthcare, energy, and consumer goods, to consider for the best investment newsletters.

However, research is very important before investing in any asset class. Do go through this comprehensive guide to top ETFs to improve your portfolio’s overall performance by providing access to a broader range of investment opportunities.

• Investors often use ETFs to rapidly diversify their portfolios at a low cost. Exchange-traded funds are excellent building blocks that provide both diversification and the ability to tilt between ETFs based on current market sentiment.
• ETFs are an excellent tool for diversifying your portfolio because of their comprehensive representation, transparency, and low cost. As there are so many exchange-traded funds listed, one is able to choose almost any market segment and buy an ETF that represents it. This allows for easy investment in a vast array of companies and assets.

Top 10 ETFs That Investors Are Using To Construct A Diversified Portfolio

Here are ten exchange-traded funds that investors are using to construct a diversified portfolio, along with their expense ratios:

1. Vanguard Total World Stock ETF (ticker: VT) – 0.09%
2. Vanguard Total World Bond ETF (BNDW) – 0.05%
3. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) – 0.59%
4. SPDR Gold MiniShares Trust (GLDM) – 0.1%
5. Invesco S&P 500 Equal Weight ETF (RSP) – 0.2%
6. iShares Global Equity Factor ETF (GLOF) – 0.2%
7. iShares MSCI Global Min Vol Factor ETF (ACWV) – 0.2%
8. Fidelity MSCI Real Estate Index ETF (FREL) – 0.08%
9. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) – 0.15%
10. Schwab U.S. TIPS ETF (SCHP) – 0.04% 

Let us have a detailed look at them. 

1. Vanguard Total World Stock ETF (VT)

According to Micah Weinstein, a senior research analyst at Crestwood Advisors, the more holdings an ETF has and the greater the distribution across regions, sectors, and categories, the greater the diversification one obtains. 

Few equities ETFs compare to VT, which contains over 9,000 worldwide market-cap-weighted companies in all 11 types in U.S. domestic, foreign developed, and developing markets. 

For an expense ratio of 0.09%, investors are able to index the investable global stock market as monitored by the FTSE Global All Cap Index.

2. Vanguard Total World Bond ETF (BNDW)

BNDW, an “ETF of ETFs,” is the bond counterpart to VT. BNDW follows the Bloomberg Global Aggregate Float Adjusted Composite Index by owning one Vanguard U.S. aggregate bond ETF and one overseas aggregate bond ETF in a nearly 50/50 proportion. 

The ETF contains approximately 17,000 bonds, including government and investment-grade business bonds. BNDW’s 5.1% yield-to-maturity and seven-year average duration provide a one-size-fits-all return and interest rate sensitivities. The ETF has an expense ratio of 0.05%.

3. Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)

As per Cluver, different asset classes have different return patterns in different macroeconomic and market environments. 

For instance, declining interest rates benefit bonds, while rising interest rates are detrimental. In an inflationary situation, commodities are the best asset class to own since they buffer against rising prices and have little correlation to equities and bonds. PDBC, with a 0.59% cost ratio, holds 

• energy
• precious metals
• industrial metals
• agriculture commodities futures contracts

4. SPDR Gold MiniShares Trust (GLDM)

Commodity ETFs, such as PDBC, rely on futures contracts, which often behave unpredictably and have a tendency to incur high costs. A physically-backed commodities ETF, like gold, is another option. 

Gold’s low correlation with equities and bonds and standing as a safe flight asset during crises make it a powerful diversifier. GLDM is an excellent method of investing in gold without possessing physical bullion.

The ETF provides exchange-traded exposure to current gold prices with a relatively low expense ratio of 0.1%.

5. Invesco S&P 500 Equal Weight ETF (RSP)

The concentration of mega-cap technology equities in S&P 500-tracking ETFs is a common criticism. Due to the market-cap-weighted nature of the S&P 500, enormous technology corporations dominate the index’s top holdings. 

Equal-weighted ETFs such as RSP provide greater diversification for investors seeking a more balanced approach. No firm or sector significantly affects this ETF’s results because it weighs all 500 S&P 500 holdings equally regardless of market cap. RSP levies an expense ratio of 0.2%.

6. iShares Global Equity Factor ETF (GLOF)

As per Weinstein, factor-tilted funds often offer another diversification layer. While the “market” component is a risk for most equities ETFs, studies show that other factors also contribute to stock results. GLOF is a factor-tilted VT alternative since it uses the value, quality, momentum, and size screenings from the STOXX Global Equity Factor Index to choose its holdings. 

Adding GLOF to VT is an easy method to acquire worldwide factor exposure for a cost of 0.2% per year. Factor ETFs often underperform for a long time. Therefore, patience is needed.

7. iShares MSCI Global Min Vol Factor ETF (ACWV)

Low volatility is an additional decisive factor that investors need to diversify across. Investors need to build reduced-risk portfolios by screening for stocks with lower equity beta and standard deviation than their sector peers or the market. The iShares MSCI ACWI ETF (ACWI) is a great globally diversified, high-volatility ETF. 

However, the ACWV is a great globally diversified, low-volatility ETF, with a beta of 0.6% and a three-year standard deviation of 13.9%, significantly less than ACWI. Like GLOF, ACWV is an excellent method of skewing an ordinary global equity ETF such as VT towards specific factors. The ETF has an expense ratio of 0.2%.

8. Fidelity MSCI Real Estate Index ETF (FREL)

The sector of real estate investment trusts, or REITs, is another significant segment of the stock exchange’s overall stock market. REITs trade like stocks, but investors overweight them in their portfolios due to their sensitivity to real estate values and future dividend payments. 

FREL, which measures the MSCI USA IMI Real Estate Index, is an excellent method to gain exposure to a diverse portfolio of U.S. REITs. This ETF appeals to income investors because of its 3.3% 30-day SEC yield. FREL levies a 0.08% expense ratio.

9. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

One common phrase about market crashes is that all correlations go to one. This means that it’s possible for even the most diversified portfolios to lose value if all assets, whether stocks, bonds, or alternatives, lose weight. 

Cash is the only technically risk-free asset, although it can’t withstand inflation. BIL is an excellent exchange-traded fund (ETF) alternative to cash in a brokerage account since it invests in Treasury bills with maturities of less than three months. Increasing interest rates provide BIL with both principal security and a reasonable yield. The ETF has an expense ratio of 0.15%.

10. Schwab U.S. TIPS ETF (SCHP)

TIPS, or Treasury Inflation-Protected Securities, are typically underrepresented or absent from the exposure of aggregate bond ETFs. TIPS and their coupons are tied to the CPI. TIPS are better than nominal bonds at protecting against abrupt inflation. TIPS are a form of U.S. 

Treasury bonds with a meager chance of default due to the government’s strong financial position. SCHP, which has a low expense ratio of 0.04%, facilitates access to a stack of TIPS with an average maturity of the intermediate term.

Identify Excellent ETFs That Meet Your Portfolio’s Requirements 

It’s important to note that these exchange-traded funds aren’t a one-size-fits-all solution and need to be chosen based on an individual’s investment goals, risk tolerance, and investment strategy. Investors must conduct their research and consult a financial advisor before making investment decisions.

Author Bio

Fatema Aliasgar is an experienced B2B and SaaS content writer based in Mumbai, India. She has done her Master’s in Business Management and has written B2B content for eight years. She has a passion for writing and enjoys creating engaging content that resonates with her audience. When she isn’t writing, she enjoys spending time with her family and playing board games with her kids.