5 ETFs That Can Help Balance Your Portfolio

Photo by: Nicholas_T

While I generally advocate against investing in individual stocks for amateur investors, I make some exceptions for ETFs.  Exchange Traded Funds are funds that trade on the stock market like a regular stock, but represent underlying assets like a mutual fund.  These ETFs give you an opportunity to hedge your stock market positions and provide some balance to your portfolio fairly easily.  While I would still recommend a lot of research before buying any of these, each of these ETFs gives you some ability to round out your positions.

GLD: Gold

I’ve been known to make fun of “Gold Bugs” now and again in my days, but you have to admit that with the specter of inflation looming over all of the spending and stimulus, gold becomes a bit more appealing.  The mechanism for this ETF is supposed to be fairly straightforward, and it’s done a good job of duplicating the returns of gold recently.  Because most of the currencies out there are from governments who are in straits just as dire as the USA, it can be appealing to find a “currency” that no government has control over.

TIP:  Inflation Protected Treasuries

Inflation Protected Treasuries are another straightforward inflation hedge.  They are not subject to the same wild fluctuations as gold and can be more appealing for that reason.  At the same time, they are dependent on the government’s calculation of consumer price index (CPI), which may not always reflect real world inflation.  Unfortunately, added inflation-based principle will be taxed immediately, which is a consideration.

TLT: Long-Term Treasuries

Treasuries provide an alternative to stocks, but are not positively correlated with inflation like TIPs or gold.  They are, however, correlated with fear in the market, which has been a pervasive force.  When people aren’t sure what to do with their money many of them flee to treasuries, which has driven up the price recently.

USO: Oil

Oil provides an interesting mix of factors to help provide alternative forces in a portfolio.  The price is very volatile, which can be a considerable concern.  It should move with inflation to some degree and unlike gold actually has some utility.  It could be a good way to participate in any recovery without being entirely exposed to economic downturns.  While oil prices will diminish with the economy, that reduction will bring about reduced production; this will eventually help move the price up.  I would be particularly wary with this fund, however, as we could easily see plunging oil prices in the short term.

DBA: Agriculture

In the same vein as oil, tracking food prices can be a good way to participate in recovery while still participating in a fund that people will use even in a recession.  Much like oil consumption, people will still eat–regardless of how bad things get.  It’s also been seriously beaten up recently, much like oil.

I am not advocating any of these funds in particular, but they are all ways for you to add more dimensions to your portfolio.  This kind of diversity was sorely lacking in a lot of people’s 401(k) accounts when the crash hit last year.  While stocks were plummeting, several of these funds are at recent highs.  Never make any moves without serious research, but these stocks may help you have a more balanced portfolio.

4 Responses to “5 ETFs That Can Help Balance Your Portfolio”

  1. Pinyo says:

    Good list. What about commodities index ETF instead of individual play in gold, oil, and agriculture?

  2. Brad says:

    Pinyo: That’s another great option. DBC is an example and it could be used to balance out your portfolio as well. I tend to prefer the more focused ETFs as they give me more fine tuned control, but that’s just me and if you have a portfolio full of stocks a commodity index tracker could be a great way to add some diversity.

  3. Jason says:

    USO isn’t a great tracker of the price of crude. It has diverged fairly sharply from the real price of oil. Its method of investing in futures means it has to roll over those futures on a regular basis which generates significant expenses and a severe tax on its performance, especially in times of contango.

  4. Brad says:

    You definitely have an issue with contango on USO and the price can diverge but you also have other problems with funds like USL. You do raise a good point however that USL could be a better buy and hold proposition than USO.

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