Case Study: Diversification

Case Summary

Cathy is a few years out of school and has been participating in her company’s stock purchase program.  Her company’s stock has done well and now represents the majority of Cathy’s portfolio.


For many investors who have been in the market for awhile, the typical portfolio is not well balanced across geographies and asset classes.  This can be problematic because a concentrated portfolio means taking on unnecessary risk and potentially missing out on returns from other parts of the market.  ETFs enable investors to easily diversify at very low cost.

For portfolios with a domestic concentration, look into International diversification. Dozens of ETFs are available that provide exposure ranging from all countries outside of the U.S. to specific countries such as IndiaChina or Israel.

Portfolios heavily weighted towards large cap stocks could add a Small Cap ETF for diversification.

If the portfolio only has equities, adding real estate or commodities can diversify some risk while maintaining or even enhancing returns.

Portfolio Recommendations

Domestic | International

Cathy should look into the iShares MSCI EAFE Index Fund (EFA) which is the most popular ETF for adding international exposure. The $48 billion ETF tracks an index of European, Australasian and Far Eastern stocks that captures 85% of total market cap.

Large Cap | Small Cap

Cathy can add small-cap exposure with Vanguard’s Small-Cap ETF (VB).  The $1 billion fund tracks a broad collection of smaller U.S. companies.

Equities | Other Asset Classes

Other options for Cathy to consider include the iShares GSCI Commodity Indexed Trust (GSG), a low cost way to gain exposure to a diversified group of commodities. In addition, Cathy could add State Street’s DJ Wilshire REIT ETF (RWR) which tracks an index of companies that own and operate a broad range of commercial real estate and comes with monthly rebalancing.