These ETFs Hit All The Right Diversification Buttons

November 02, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Rusty Vanneman, chief investment officer of Omaha, Nebraska-based CLS Investments.

The U.S. stock market, at least defined by the large companies in the Standard & Poor’s 500 Index, is at an all-time high. It’s been an incredible bull market—extending its streak as one of the longest and strongest in U.S. stock market history.

While U.S. large-caps have had a nice run, and in turn their valuations have gotten stretched, not all markets have participated in the strong gains and became over-valued. Some markets are still well off their all-time highs.

At the end of August, for example, emerging market equities (MSCI Emerging Markets Index) were still 20% below their highest point. Commodities (Bloomberg Commodity Index), meanwhile, were more than 60% below their peak.

One Diversification Button

For investors—particularly those with heavy allocations to large, domestic companies—where is a good place to diversify and increase exposure? The answer is an investment that can hit all these buttons:

  • Alternatives: By providing a quirky, lower-correlation (behaves differently from the U.S. stock market) asset.
  • Commodity: Because commodity markets appear to be emerging from one of their sharpest, deepest bear markets ever.
  • Low Volatility: Because of the aforementioned diversification benefits of a lower correlation, it can help reduce overall portfolio volatility.
  • Contrarian: Many investors have decreased their exposure to this asset class in recent years due to poor performance.

In addition, this investment has the following benefits:

  • It takes advantage of emerging market economic demand.
  • It should be aided by rising inflation, which has been creeping higher lately.
  • It should see plusses from climate change.
  • It should help investors make money. Valuations relative to the overall market are at some of their most attractive levels in years.

Those are a lot of buttons and benefits, and they are the reasons we’re increasing allocations to this asset class. We are talking about commodity-producer equities (or natural resource equities).


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