3 Great Portfolio Diversifiers and 3 to Avoid

Russel Kinnel: Diversification is a good thing. You want to have large-cap stocks and investment-grade bonds make up the core of your portfolio. Diversification plays can help your portfolio by behaving differently from your core. They might gain in a downturn, though they might also lose money in a rally.

3 Great Diversifiers for Your Portfolio

1. The Merger Fund A MERFX
2. BlackRock Tactical Opportunities PCBAX
3. Artisan Developing World Investor ARTYX

One such play is Merger Fund. The fund does merger arbitrage, a strategy with very low correlation with the stock market. The idea is to bet on mergers that are likely to go through and capture a modest merger premium. You can do that by buying the target and shorting the buyer. The market’s direction will actually have very little impact on this fund’s performance.

Another idea is BlackRock Tactical Opportunities. The fund uses an array of quantitative inputs to guide long and short bets on a wide range of indices. The result is generally single-digit positive calendar real returns that are not correlated with the broad stock and bond markets.

My third idea is a simple, long-only emerging-markets fund, though one with particularly low correlations to the S&P 500. Artisan Developing World is run by Lewis Kaufman. He builds a focused portfolio of companies with good business models and healthy cash flows. The fund’s kind of a maverick that doesn’t closely track emerging or developed markets.

Now for the three to avoid.

3 Diversifiers to Avoid

1. Nuveen Global Infrastructure Fund Class I FGIYX
2. TETON Westwood Mighty Mites Fund Class A WMMAX
3. Cryptocurrency

Global infrastructure is a nice diversifier from the S&P 500, as the names don’t move in sync very much with the US economy. However, Nuveen Global Infrastructure has a quirky strategy with very active tactical trading. It worked well under the previous manager, but he’s retired, and the strategy seems an even stranger fit now that he’s gone.

Micro-caps are another low correlation area, but Teton Westwood Mighty Mites isn’t the way to do it. The fund has been beset by outflows, and it holds micro-caps with very limited liquidity. That means selling can push the prices down, and you can’t get out that quickly. Fully four-fifths of the portfolio trade less than $10 million dollars a day.

Finally, I want to mention cryptocurrency. When it first came out, it was really hyped as a great hedge for inflation and a hedge against equities. That’s not really how it’s worked. A few years ago, we had an inflation spike, the Federal Reserve raised rates, and crypto went down, and since then, crypto has really behaved a lot like a sort of levered Nasdaq or tech fund. If you have a lot of tech stocks, crypto really hasn’t been much of a diversifier for you. Maybe it will in the future. That’s fairly unpredictable, but so far, it hasn’t really been that diversifier that we’d hoped it would be.

Watch 3 Great Funds for Your IRA in 2026 for more from Russel Kinnel.