ETF Expert

One of the best investment decisions that I've made in 2009 has been overweighting materials ETFs. At the same time, I've cautioned investors time and again to be cognizant of their overall exposure.

In "Uggggh… "I Like The Materials And Energy ETFs," I discussed how owning Brazil (EWZ) and Global Materials (MXI) is quite risky because the assets have a near perfect correlation (.99).

And for some folks, their overexposure to similar stock ETFs hardly ends there. For instance, there are those who erroneously believe that they are diversified across emerging market investments because they own China 25 Index (FXI), Emerging Asia & Pacific (GMF) and South Africa (EZA). All of these investments have risen and fallen in direct sync with one another… each correlating at .99.

In fact, over the previous 6 to 12 months, emerging market countries and regions have acted as proxies for the basic materials sector. Or perhaps one might say it has been the other way around. (Note: I alluded to this phenomenon last month in a feature, "The Country With the Most Stuff… Wins!")

Regardless, Vanguard Emerging Markets (VWO) has been moving in the same direction as Basic Materials (XLB), Global Materials (MXI) and International Materials (IRV). Moreover, performance differences can be tied almost as much to currency fluctuations as actual differences in index components.

This is not to say that there aren't performance differences between highly correlated assets. It simply means that you are effectively doubling or tripling down on the singular theme of basic industry/"stuff."

If you need to lighten up on your materialism, and if you're looking for low correlating or non-correlating assets, State Street offers a free correlation tool on the web. Eddie Kwong and Larry Connors of Trading Markets reminded me of the Select Sector SPDRS Correlation Tracker.

If you're looking to fill out that portfolio with assets that can zig while your other assets can zag…
If you want some assets to be heavy on capital appreciation potential while others deliver consistent income…
If you want to hedge against dollar devaluation and/or inflation, but don't want to "do it all" in stock assets or industrial-use commodities…

You may want to review the column "Best ETFs To Diversify Your Portfolio."

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site