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Alternative Funds That Add Diversification

Interest-rate fears and potential tapering of the Fed's bond buys could put these diversifying offerings on investors' radars.

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At a time when correlations have increased among many asset classes, finding investments that provide true diversification can be a challenge. 

A takeaway from the market collapse of late 2008 was that even a diversified portfolio of equities can get hammered in an environment when investors are fleeing riskier asset classes. While the S&P 500 index of large and mid-cap companies lost 37% that year, small-cap stocks lost about the same amount, and foreign and emerging-markets stocks lost even more (43% and 53% respectively). However, during this time high-quality bonds proved their mettle as diversifying investments--the Barclays U.S. Aggregate Bond Index of investment-grade U.S. bonds gained 5% on the year. But today, with fears of rising interest rates and a pullback of the Fed's asset purchases, many investors might be looking for alternative tools of diversification.

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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