The concept of diversification is not new, but, unfortunately is still misunderstood. Many investors think that they are diversified, when in actuality they are not. For example, the average Jim Cramer type investor might have a portfolio that consists the following top 5 holdings:
Long Apple
Long General Electric
Long McDonald's
Long Bank of America
Long Conoco Phillips
In the above hypothetical example, there is some diversification to be sure, but nonetheless the entire portfolio is 100% long, 100% in stocks, and 100% American. This means that if the market tanks, the above portfolio will almost certainly tank as well.
On the other hand, here are 5 holdings that I have in my own personal trading account:
Long Gold
Short Natural Gas
Long Metro Inc (MRU.A on the Toronto Stock Exchange)
Short Vimpel Communications
Short Dow Chemical
As you can see, I am long commodities, short commodities, long stocks, and short stocks. This is a much stronger portfolio, and is better able to absorb large market fluctuations. With the above mentioned ETF, an investor can add diversification to their stock portfolio, since the price of grains probably exhibits little correlation to, say, the price of Apple stock. Furthermore, ETFs can also allow investors to explore bonds, interest rates, and currencies, but more on that later.
(This is not a recommendation to buy or sell this ETF. It is for informational purposes only)
