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Diversify Your Portfolio with Exchange-Traded Funds (ETFs) |
by S. Wade Hansen
Diversifying with Exchange-Traded Funds (ETFs)
ETFs provide you not only with instant diversification within the fund but also with the ability to diversify across a sweeping range of markets and investments. Using ETFs, you can invest in the U.S. stock market, global stock markets, the commodity market and the forex market without ever leaving your basic stock account. 
Check out these Two Ways to Invest in Commodities with ETFs.
General Exchange-Traded Fund (ETF) Categories
To get an idea of just how expansive the ETF universe really is, take a look at this. ETFs are easily grouped into the following categories:
- Broad-based equity index funds
- Domestic sector index funds
- Domestic style index funds
- International index funds
- International country index funds
- International sector index funds
- Bond funds
- Commodity funds
- Currency funds
- Specialty funds
Next, we're going to cover what each of these categories consist of. And at the end, we'll show you how you can get information on specific ETFs that cover each of these categories.
Broad-based equity index funds are perhaps the most popular ETFs. You can buy ETFs the cover any or all of the following equity indexes:
- S&P 500
- Dow Jones Industrial Average
- Russell 2000
- Wilshire 5000
Domestic sector index funds give you access to broad market sectors without having to choose individual stocks within those sectors. For instance, if you believe the healthcare industry is going to grow and be more profitable in the future, you can buy an ETF that covers the entire industry, not just a few healthcare stocks. You can gain easy access to the following sectors using these ETFs:
- Basic materials
- Consumer services
- Consumer goods
- Energy
- Financial
- Financial services
- Healthcare
- Industrial
- Real estate
- Technology
- Telecommunications
- Transportation
Domestic style index funds allow you to invest in those stock styles you have probably heard so much about from your financial planner. You can invest in the following styles using ETFs:
- Large cap
- Large cap value
- Large cap growth
- Mid cap
- Mid cap value
- Mid cap growth
- Small cap
- Small cap value
- Small cap growth
International index funds give you one-stop shopping access to stocks from around the world. You can invest in the following groups of international stocks with ETFs:
- Europe / Asia / Far East (EAFE)
- Brazil / Russia / India / China (BRIC)
- Emerging markets
- Asia
- Europe
- Latin America
International country index funds allow you to tailor you international investments to specific countries. For instance, if you believe the economy in Brazil is going to grow during the next few years, you can buy an ETF that invests solely in Brazilian stocks. You can invest in the following countries using ETFs:
- Australia
- Austria
- Belgium
- Brazil
- Canada
- Chile
- China
- France
- Germany
- Hong Kong
- Israel
- Italy
- Japan
- Malaysia
- Mexico
- Netherlands
- Singapore
- South Africa
- South Korea
- Spain
- Sweden
- Switzerland
- Taiwan
- Thailand
- Turkey
- United Kingdom
International sector index funds allow you fine tune your international investing even further by investing is specific worldwide sectors. For instance, if you believe the energy markets around the world are going to grow and flourish as a larger percentage of the world's population rises out of poverty, you could buy a global energy fund. You can get access to the following global sectors using ETFs:
- Global clean energy
- Global consumer discretionary
- Global consumer staples
- Global energy
- Global financial
- Global healthcare
- Global industrials
- Global infrastructure
- Global materials
- Global nuclear energy
- Global technology
- Global telecommunications
- Global timber & forestry
- Global utilities
Bond funds give you access to myriad bonds without having to buy bonds in bulk or deal directly with a bond dealer. For instance, if you want to invest in Treasury Inflation Protection Securities (TIPS), you can simply buy the ETF. You can gain access to the following groups of bonds with ETFs:
- 1-3 year Treasuries
- 3-7 year Treasuries
- 7-10 year Treasuries
- 10-20 year Treasuries
- 20+ year Treasuries
- Treasury Inflation Protection Securities (TIPS)
- Corporate bonds
- Municipal bonds
Commodity funds allow you diversify your portfolio into commodities without having to buy futures contracts. For instance, if you want to invest in oil, you can buy an oil ETF. You can invest in the following commodities using ETFs:
- Oil
- Gold
- Silver
- Agriculture
- Base metals
Currency funds give you direct access to the forex (foreign exchange) market. For instance, if you believe the Chinese yuan is going to increase in value as the Chinese economy grows and plays a larger role in the global economy, you can buy an ETF that invests in the Chinese yuan. You can invest in the following currencies using ETFs:
- Australian dollar
- Brazilian real
- British pound
- Canadian dollar
- Chinese yuan
- Euro
- Indian rupee
- Japanese yen
- Mexican peso
- New Zealand dollar
- Russian ruble
- South African rand
- Swedish krone
- Swiss franc
- U.S. dollar
Specialty funds allow you to expand your investment horizons. However, specialty funds are typically a little more expensive---which means you will pay a larger fee each year. You can participate in the following specialized investments using ETFs:
- Real-estate investment trusts (REITs)
- High dividend-paying stocks
- Global clean energy
- Global water
- BuyWrite (covered call)
- Value Line
- Zacks
Exchange-Traded Fund (ETF) Providers and Managers
Instead of trying to list every available ETF here on this page---an impossible task because the number of ETFs available is constantly in flux---we are going to link to ETF listings from the following ETF providers/managers:
- iShares: which is most noted for its passively managed index funds
- PowerShares: which is most noted for its specialty, dynamic and actively-managed funds
- CurrencyShares: which is most noted for its currency funds
NEXT: Learn how to Profit from Inflation with Bond ETFs.
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