http://globalcapital.blogspot.com

I recently posted the charts of various stock indexes from around the world. I removed the symbols so that readers could see that the charts were almost identical, despite that they represented many different markets and countries.

The nature of ETFs is that they include a basket of equities rather than a single one. This spreads risk, but it also makes them more homogeneous as well. In other words, they all begin to look about the same!

Sector charts, like the ones I posted for various countries, also look fundamentally the same. If I did the same thing with sector charts, they would also be almost indistinguishable. Surprising, but true! If you look at the charts of Microsoft, Google, Intel, or SanDisk, they all look very different, but if you combine them into a single tech sector ETF, they begin to look more and more like the broader S&P 500, Dow, or NASDAQ charts.

The point is that as long as we are trading baskets of equities in ETFs, they will tend to have an appearance similar to the broad market. There really is no true diversification amongst baskets of equities.

I saw an article recently from Kliplinger. They told investors to become diversified by using various sector, size, and global ETFs. What they didn't tell the readers was that the charts for ALL 11 ETFS looked almost identical to each other. They all went DOWN!

Here are the charts. See if you can tell the difference:

http://globalcapital.blogspot.com/2008/07/decoupling-debunked.html

The only true diversification is among various asset classes, including fixed income, agricultural and energy commodities, and currencies.