Traditionally, investors have sought to smooth out the volatility of equity portfolios through the addition of fixed income securities. But in the current liquidity-fueled environment, the relationship between stocks and bonds has strengthened considerably. Since the beginning to 2009, the correlation between the S&P 500 SPDR (SPY ) and the broad-based Barclays Capital Aggregate Bond Fund (AGG ) is close to 0.90, a figure sure to astound many investors.

As far as adding diversification benefits, commodities arent much betterat least they havent been recently. Many investors view natural resources as a potential diversifying agent when added to traditional stock-and-bond portfolios. But since the collapse of Lehman Brothers, the correlations between stocks and commodities has strengthened considerably. As prospects for the global economy dim, so too does demand for raw materials. The PowerShares DB Commodity Fund (DBC ) is one of the most broad-based products available, investing in futures contracts of more than a dozen natural resources. That fund has exhibited a correlation of more than 0.80 with SPY since the beginning of 2009, indicating that commodities have been disappointing investors who had expected exposure to a non-correlated asset [see Five ETFs To Give Your Portfolio Much-Needed Diversification ].

At a time when non-correlated assets have become increasingly important to investors, they have also become increasingly difficult to track down. Difficult, but not impossible; within the ETF universe there are a number of options for investors looking to add a low-volatility asset to their portfolios. Below, we profile three funds that may not enhance a portfolios total return significantly, but can go a long way in smoothing out the ups and downs.

• PIMCO Enhanced Short Maturity Strategy Fund (MINT ): This actively-managed fund is the closest thing to a money market ETF out there; according to the issuers web site, MINT seeks to deliver maximum current income, consistent with preservation of capital and daily liquidity. That means that MINT invests primarily in short duration investment grade debt securities, including government bonds, high quality credit bonds, munis, and mortgage-backed securities [see Five Safe Haven ETFs To Ride Out The Storm ].

• IQ CPI Inflation Hedged ETF (CPI ): This ETF stands out as an alternative to inflation-protected bonds for investors worried about a big uptick in the Consumer Price Index. CPI invests in other ETFs and generally maintains a core holding in short-term bonds, which generally serves as a good proxy for the rate of inflation. Around that core holding, CPI rotates various asset classes depending on macroeconomic conditions with the objective of delivering a real return above the rate of inflation. CPI is a relatively young ETF, but has a history of low volatility that can be desirable for investors looking to smooth out their portfolios [see CPI’s current holdings ].

• Diversified Alternatives Trust (ALT ): This product isnt one of the best known iShares products, but is certainly one of the most unique. ALT is the only product in the iShares lineup that doesnt seek to replicate an index; instead it strives to maximize absolute returns from investments with historically low correlation to traditional asset classes while seeking to control the risks and volatility inherent in futures and forward contracts by taking long and short positions in historically correlated assets. The combination of long and short positions may sound like a recipe suitable for only the most risk tolerant investors, but in reality ALT exhibits very low volatility [see more on the ALT fact sheet ].

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Disclosure: No positions at time of writing.

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