The U.S. market as tracked by the S&P 500 is down in the neighborhood of 14% so far this year. Investors concerned about inflation and the devaluation of the U.S. dollar, but still comforted by their investments in U.S. stocks can find relief with a compliment of four exchange-traded funds. (To begin with the basics, read A Guide To Portfolio Construction and Pump Up Your Portfolio With ETFs.)

Start With a Foundation
The SPDR S&P 500 Index (AMEX:SPY) offers investors exposure to both U.S. and international markets since approximately 45% of revenues from companies on the index are derived overseas. For example SPY's top holding Exxon Mobil (NYSE:XOM) reported that 69.18% of its revenues for the first half of the year were generated outside of the U.S. With the SPY acting as the portfolio foundation the next move is to add a non-correlated asset class. (To learn more about international diversification check out Going International.)

Add the Raw Materials

The PowerShares DB Commodity Index Tracking Fund (AMEX:DBC) grants investors access to a basket of commodities including crude oil, corn, wheat, aluminum and the flight to quality favorite gold. Commodities are thought of as a safe haven against inflation and as an asset class that moves in the opposite direction of the broad S&P 500 index. DBC has fallen back from recent highs in July, but it has still returned about 8.7% since the beginning of the year. A fixed income play is the next stop for our balanced portfolio.

Mix in Fixed Income

The iShares Lehman TIPS Bond (AMEX:TIP) is another inflation protection vehicle with the added benefits of low volatility and a healthy 5.91% yield. TIP can represent the fixed income foundation to give investors stability and a fund designed to rise along with the Consumer Price Index thereby easing the sting of a falling U.S. dollar. The TIP ETF has returned about 3.6% so far this year.

A Dash of International Flavor
The Claymore ETF:BNY BRIC (AMEX:EEB) offers investors exposure to fast growing markets outside of the U.S. including Brazil, Russia, India and China. The EEB fund has the greatest potential for growth in the balanced portfolio and will also carry the most amount of risk. An investor can reflect on EEB's return of about -32.7% since the beginning of the year as a barometer for the deep downturns investing in overseas markets can deliver.

Taste Test
Based on an investor's risk tolerance the portfolio can be balanced to meet his or her individual needs. Investors with a short time horizon should play it safe and heavily weight their portfolio with fixed income. Investors with more time to spare have the opportunity to absorb the pullbacks of volatile overseas investments.

To dig deeper into the subject of managing risk, read Measuring and Managing Investment Risk.

Related Articles
  1. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  2. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  3. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  4. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  5. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  6. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  7. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  8. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  9. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  10. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!