Best ETFs for Portfolio Diversification
Reduce risk with assets that move differently
ETFs tracked
229
Avg TER
0.81%
Median Beta
0.49
Diversification is the only free lunch in investing. By holding assets that do not move in lockstep, you can reduce portfolio volatility without necessarily sacrificing returns. Diversification ETFs provide exposure to strategies and asset classes that have low or negative correlation with traditional stocks and bonds.
The classic 60/40 portfolio was built on the idea that stocks and bonds move in opposite directions. That assumption broke spectacularly in 2022, when both stocks and bonds fell simultaneously for the first time in decades. This shook many investors' faith in traditional diversification and renewed interest in genuinely uncorrelated alternatives.
Managed futures ETFs like DBMF and KMLM were the standout diversifier of 2022, delivering positive returns while everything else fell. These funds use systematic trend-following strategies across commodities, currencies, and interest rates. Their correlation to the S&P 500 has been near zero or slightly negative over the past decade.
Other diversification tools include market-neutral strategies (which aim for zero market exposure), multi-strategy alternatives (which combine several uncorrelated approaches), and risk parity funds (which balance risk across asset classes rather than capital). Each approach has different mechanics but serves the same purpose: ensuring your portfolio does not depend entirely on stocks going up.
The key metric for diversifiers is not return. It is beta and correlation. A diversification ETF that returns 3% with zero correlation to equities can improve your portfolio's risk-adjusted returns more than an equity fund returning 10% with a correlation of 0.95.
Who this is for
- Investors overweight in equities seeking balance
- Portfolio builders looking for non-correlated returns
- Anyone who wants smoother portfolio performance across market cycles
Top 10 ETFs
Browse all 229 diversifier ETFs
Filter, sort, and compare in the Beacon screener
Open screenerFrequently asked questions
- What does it mean for an ETF to be uncorrelated?
- An uncorrelated ETF moves independently of the stock market. When the S&P 500 drops 10%, an uncorrelated asset might go up, down, or stay flat. Its movement is not driven by the same forces. This is measured by correlation coefficient (ranging from -1 to +1) and beta (sensitivity to market moves). A beta near zero indicates genuine diversification value.
- Did diversification fail in 2022?
- Traditional stock-bond diversification failed in 2022, but alternative diversifiers worked well. Managed futures ETFs like DBMF returned +20% while the S&P 500 fell -18% and bonds (AGG) fell -13%. The lesson was not that diversification failed, but that stocks and bonds alone are not sufficiently diversified.
- How much should I allocate to diversifiers?
- Most portfolio strategists suggest 10-20% in alternative or uncorrelated strategies. The All-Weather portfolio concept allocates roughly 40% outside traditional equities. The right amount depends on your tolerance for tracking error: alternative strategies often lag in strong bull markets, which can be psychologically difficult.
- Are alternative ETFs more expensive?
- Yes, typically. Managed futures and multi-strategy ETFs often charge 0.50-0.85%, compared to 0.03-0.10% for index equity ETFs. This is partly because the strategies are more complex to implement. However, the diversification benefit can still improve your portfolio's overall cost-adjusted return.
Build a portfolio for this goal
The classic 50/50-ish split. Equity for growth, bonds for ballast, alternatives for diversification.
See the Balanced portfolio →Browse by Asset Class
Alternative→Find alternative ETFs: managed futures, market neutral, multi-strategy, and hedge-fund-style funds ranked by Beacon's quality score.
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