This article originally appeared on Traders Reserve.
If you’ve been long stocks over the past six weeks, then you’re probably sitting on some very nice gains. That’s because stocks have seen a substantial surge nearly across the board since dipping to their recent lows. In fact, since the S&P 500 fell to its most-recent low on March 16, the broad measure of the market is up more than 7%.
In the face of that kind of broad-based gain, you may be tempted to keep the gas pedal to the floor and go for more. The only problem with this strategy is that stocks never go up in a straight line, and that means we are liable to see a pullback soon that could put the brakes on your trading. Yet there is a way to make sure you don’t fall victim to being too bullish here, and that way involves using various exchange-traded funds (ETFs) to diversify your portfolio.
The beauty of ETFs is that they allow you to gain exposure to a variety of market sectors via one low cost (i.e., low expense ratio) “basket” of securities pegged to a particular index. For example, let’s say you still remain bullish on stocks but you didn’t know precisely which individual stocks you want to trade? In that case, you could buy an ETF such as the SPDR S&P 500 (NYSE: SPY), an ETF pegged to the fortunes of the S&P 500. The “Spiders,” as they are known, have been around for a long time, but now there’s a host of other ETFs that allow you to truly diversify your portfolio — not just in the number of stocks you own, but in the sectors of the market you own.
One traditional way to diversify a stock portfolio is to own bonds, and that can be done easily with an ETF such as the iShares 20+ Year Treasury Bond Fund (NYSE: TLT), a fund that gives you exposure to the long end of the U.S. Treasury market.
Another way to diversify your trading portfolio, as well as a great way to hedge to the falling U.S. dollar, is via commodity ETFs pegged to the precious metals segment.
For example, the SPDR Gold Shares (NYSE: GLD) is an ETF that allows you easy access to the spot price of gold, while the iShares Silver Trust (NYSE: SLV) gives you exposure to the spot price of silver. Both of these trades have been screaming winners of late, and that’s given traders with a diversified portfolio an extra leg up on profits.
In addition to precious metal’s funds, there are many other commodity ETFs that allow you to even further diversify your stock trading portfolio. One of the biggest is the PowerShares DB Commodity Index Tracking (NYSE: DBC), an ETF that’s pegged to the Deutsche Bank Liquid Commodity Index. The index consists of light, sweet crude oil, heating oil, gasoline, natural gas, Brent crude, gold, silver, aluminum, zinc, copper, corn, wheat, soybeans and even sugar. Basically, you’re getting the most diverse basket of commodities out there all in one easy-to-own ETF.
If you’re looking for ways to diversify your trading portfolio, then the ETFs mentioned here represent a very solid start.
For more trades, ideas and strategies, visit Traders Reserve.
