U.S. equities, as represented by the S&P 500 index, have had a rough start to 2025, largely due to uncertainty…
U.S. equities, as represented by the S&P 500 index, have had a rough start to 2025, largely due to uncertainty created by Trump administration policies.
In addition to on-again, off-again threats to impose tariffs against longstanding trade partners like Canada and Mexico, the White House has walked back military aid for Ukraine, creating further market jitters.
As of March 7, the S&P 500 is down 1.9% year to date, but not all global markets are facing the same headwinds. European equities have been a notable outperformer, with the benchmark Euro Stoxx 50 index up 12.3% over the same period.
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This outperformance was driven by a resurgent European defense sector amid speculation that Europe may need to rearm itself, concerns stoked by an increasingly isolationist U.S. and Russian President Vladimir Putin’s expansionist ambitions.
The divergence in performance between the U.S. and Europe highlights the pitfalls of a “just buy the S&P 500” mindset. A home-country bias leaves investors exposed to single-country risk, which is an uncompensated risk — meaning it does not come with higher expected returns.
Diversification is the antidote to this risk. You can reduce volatility and offset potential periods of stagnation in U.S. equities by adding assets that zig when others zag.
This could mean incorporating European equities, as well as equities from other developed markets like Japan or Canada, or even emerging markets such as China and India.
Better yet, fixed-income investments can provide a steady income stream and recession protection since bonds lack market risk. Their value is less influenced by equity market movements and more by credit spreads and interest rate movements.
“Different asset classes provide vastly different return profiles during distinct macroeconomic and market environments,” explains Michelle Cluver, head of ETF model portfolios at Global X ETFs. “For example, equities and fixed income traditionally have a low correlation, so fixed income can provide a cushion during periods of economic stress where equities are likely to face headwinds.”
And if stocks and bonds were to fall in tandem as they did in 2022, there are still alternatives to consider, such as precious metals, energy commodities or hedge-fund-like strategies that use derivatives to generate returns independently of market direction.
Today, rebalancing between these diversifying assets is easier than ever, thanks to the wide availability of exchange-traded funds (ETFs).
With an ETF, you can gain exposure to a wide swath of securities through a single trade, simplifying the process of asset allocation and making diversification more accessible to everyday investors.
Here are 10 of the best ETFs for diversifying a U.S.-focused stock portfolio:
| Fund | Expense ratio |
| iShares U.S. Treasury Bond ETF (ticker: GOVT) | 0.05% |
| Vanguard Total International Stock ETF (VXUS) | 0.05% |
| iShares Aaa — A Rated Corporate Bond ETF (QLTA) | 0.15% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.14% |
| iShares Global Energy ETF (IXC) | 0.41% |
| Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) | 0.59% |
| Simplify Managed Futures Strategy ETF (CTA) | 0.76% |
| JPMorgan Hedged Equity Laddered Overlay ETF (HELO) | 0.50% |
| Alpha Architect Tail Risk ETF (CAOS) | 0.63% |
| SPDR Bridgewater All Weather ETF (ALLW) | 0.85% |
iShares U.S. Treasury Bond ETF (GOVT)
“Combining stocks and higher-quality investment-grade bonds is much more likely to achieve a higher level of diversification,” says David James, managing director at Coastal Bridge Advisors. “When stocks go down in value, high-quality bonds often produce positive returns.”
The highest quality bonds are Treasurys, which are backed by the full faith and credit of the U.S. federal government. Investors can access Treasurys ranging from 1-year to 30-year maturities via GOVT, which charges a low 0.05% expense ratio. This ETF currently pays a 4.3% 30-day SEC yield.
Vanguard Total International Stock ETF (VXUS)
“We generally stick to U.S. equity, international equity and fixed income,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. Thanks to ETFs, investing in international equities is cheaper than ever. A great example is VXUS, which charges a 0.05% expense ratio.
This ETF tracks the FTSE Global All Cap ex U.S. Index. In a single ticker, investors get exposure to over 8,500 market-cap-weighted international equities from developed and emerging market countries. The use of passive indexing also keeps portfolio turnover low at 3.4%, which improves tax efficiency.
iShares Aaa — A Rated Corporate Bond ETF (QLTA)
“Bond investors can tailor their allocation based on their tolerances for interest rate risk and credit quality,” says Bryce A. Doty, senior vice president and senior portfolio manager at Sit Investment Associates. For example, investors looking for a higher yield than GOVT might find QLTA appealing.
This ETF holds corporate bonds, which have more credit risk than Treasurys but pay higher yields. However, QLTA only holds bonds rated “A” and higher, which gives it a much higher quality than most investment-grade corporate bond ETFs. QLTA pays a 4.9% 30-day SEC yield.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
“We caution clients to be careful using long-duration Treasury ETFs to protect against periods of negative stock market returns given their heightened sensitivity to inflation pressures,” Doty says. “As we saw in 2022, the influence of inflation on long-duration bonds trumped all else.”
To avoid interest rate risk, consider using a Treasury bill (T-bill) ETF like BIL. The net asset value of this ETF remains relatively stable, while its income potential fluctuates with the Federal Reserve’s policy interest rate. Right now, BIL is paying a 4.1% 30-day SEC yield and has monthly distributions.
iShares Global Energy ETF (IXC)
“We continue to believe that energy companies are an underappreciated gem in the value space,” Grossman says. “Low oil prices have pushed their break-even lower than 10 years ago, and the capital discipline acquired from going through tough markets has focused them on cash flow generation.”
Energy stocks can provide a valuable inflation hedge during years like 2022 while also paying above-average dividends. IXC provides exposure to a basket of 52 global energy stocks spanning upstream, midstream, downstream and integrated companies. The ETF pays a 3.6% 30-day SEC yield.
[Read: 7 Best Energy ETFs to Buy Now]
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
Investors can avoid market risk by opting for a derivative-based commodity ETF over one holding commodity producer stocks. For example, ETFs like PDBC gain synthetic exposure to energy, precious metals, industrial metals and agricultural commodities via the use of futures contracts.
PDBC’s portfolio is fairly volatile but can be a good diversifier for stocks and bonds given it has a low correlation to both. In addition, the ETF does not require investors to file a Schedule K-1 form come tax time. However, it does make large capital gains distributions in December, so tax efficiency isn’t the best.
Simplify Managed Futures Strategy ETF (CTA)
“CTA’s daily positioning is driven by an institutional, hedge fund algorithm developed and managed by Altis Partners, who has deep experience in managed futures and systematic trend following strategies,” says Paisley Nardini, managing director, portfolio manager and asset allocation strategist at Simplify.
This ETF uses a quantitative model to take long and short positions across 30-plus commodity and interest rate futures markets. Since its March 2022 inception, CTA has delivered an 11.1% annualized return that has been uncorrelated to both stocks and bonds, giving it good diversification potential.
JPMorgan Hedged Equity Laddered Overlay ETF (HELO)
Options-based strategies can also provide investors with diversification by hedging losses. A great example is HELO, which uses a laddered series of put spreads to reduce downside risk markedly while also limiting some upside appreciation. Despite its complexity, HELO charges a reasonable 0.5%.
HELO’s strategy is managed by Hamilton Reiner, the same portfolio manager behind the longstanding and similar JPMorgan Hedged Equity Fund (JHEQX). Morningstar gives JHEQX five stars, meaning it has historically outperformed the majority of its peers on a risk-adjusted basis.
Alpha Architect Tail Risk ETF (CAOS)
HELO’s strategy can cushion losses during a downturn, but some advanced options-based ETFs can actually benefit from a crash. For example, CAOS delivered strong positive returns during the 2020 COVID-19 crash thanks to its put spread strategy, similar to that of an insurance policy.
Normally, tail-risk strategies incur negative carry — like an insurance policy, they usually cost ongoing capital to maintain, which can erode returns. However, CAOS is cleverly structured to minimize this — in fact, between periods of market turmoil, the ETF has delivered modest positive returns.
SPDR Bridgewater All Weather ETF (ALLW)
Some multi-allocation ETFs offer built-in diversification. A great example is the newly launched ALLW, which emulates Bridgewater Associates’ and Ray Dalio’s famous “All Weather” hedge fund. This ETF’s unique “risk parity” allocation strategy is designed to remain resilient across different economic cycles.
ALLW uses derivatives like swaps and futures to gain exposure to 72% global bonds, 43% global equities, 37% commodities and 32% inflation-linked bonds. These allocations add up to more than 100%, meaning that the ETF is inherently leveraged. However, this does come at a higher 0.85% expense ratio.
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10 ETFs to Build a Diversified Portfolio originally appeared on usnews.com
Update 03/10/25: This story was published at an earlier date and has been updated with new information.