As seasoned investors know, any potential investment must be evaluated not on a stand-alone basis but on its contribution to an overall portfolio. In addition to considering the risk and return profile of a particular asset, the relationship between that asset and the other holdings of the investor is of vital importance in the construction of an efficient portfolio. The addition of assets that maintain low or negative correlations with other portfolio components can add valuable diversification benefits [see 1,400+ ETFdb Realtime Ratings ].

Historically, investors have embraced international equities and real estate as strategic diversifiers to reduce overall portfolio volatility. And, historically, these asset classes did a pretty good job. But as most investors are painfully aware, international diversification let them down just when they needed it most. The most recent recession was global in nature, and correlations between the worlds equity markets shot towards 1.0 as the chaos ramped up. Real estate was a similar story. Instead of smoothing out volatility, REITs exacerbated losses.

Bonds were relatively efficient at smoothing volatility and preserving capital as the recession set in, but the historically low correlation with equities has broken down following the unprecedented injections of liquidity into the financial system. In a liquidity-driven market, stocks and bonds now move in the same direction with surprising regularity. Since the beginning of 2009, the correlation between the S&P 500 SPDR (SPY ) and the Barclays Aggregate Bond Fund (AGG ) has been an unbelievable 0.94 (although AGG remains far less volatile). The correlations between SPY and investment grade corporate bonds (as represented by LQD) and junk bonds (as represented by JNK) have been even higher at 0.96 and 0.99, respectively.

So following the recent recession, investors have gone back to square one in their efforts to build a portfolio consisting of non-correlated assets. This task is perhaps more challenging now than ever before, but is by no means impossible. Below, we profile five ETFs that maintain relatively low correlations with SPY (for more ETF insights, sign up for our free ETF newsletter )

5. PowerShares DB U.S. Dollar Index Bullish (UUP )

This ETF is designed to replicate the performance of being long the U.S. dollar against a basket of developed market currencies. Although the biggest exposure is relative to the euro (approximately 58%), UUP also offers exposure against the yen. pound, Canadian dollar, Swedish krona. and Swiss franc.

Since its launch in May 2007, UUP has exhibited a correlation of about -0.40 with SPY, and was one of the few non-inverse ETFs that delivered a positive return between September 2009 and March 2009 (it gained about 7% over a period during which SPY lost more than 35%).

4. SPDR Gold Trust (GLD )

No discussion of strategic diversifiers would be complete without a mention of gold. As a popular safe haven investment during times of economic uncertainty, the precious metal has a history of performing well during bear markets. Since it was introduced in late 2004, GLD has maintained an inverse relationship with SPY, and investors who owned this fund during the most recent recession were very glad they did (its correlation from September 2008 to March 2009 was about -0.35).

But the assumption that gold will always serve as an effective diversifier may be an erroneous one: since the bear market lows in March 2009, GLD and SPY have moved roughly in lock step, exhibiting a correlation of nearly 0.90 as gold has taken its cues from the greenback [see Free Report: Everything You Need To Know About Commodity ETFs ].

3. ELEMENTS S&P CTI ETN (LSC )

When promoting the concept of commodity investing, the diversification benefits of the fourth asset class is often one of the primary arguments. But the relationship between commodity ETFs and domestic stocks is likely stronger than many investors realize. Since its inception in February 2006, the PowerShares DB Commodity Fund (DBC ) has exhibited a correlation with SPY of about 0.40. While this is far lower than the correlation between SPY and international equity funds, its still indicative of a moderately strong positive relationship.

LSC is not your traditional commodity fund. The index to which this ETN is linked applies a long/short strategy to six commodity sectors comprised of sixteen traditional, physical commodity futures contracts. The individual commodities are grouped into six sectors (energy. grains. industrial metals, precious metals, livestock. and softs ) and each sector, except the energy sector, is represented on either a ‘‘long’’ or ‘‘short’’ basis, depending on recent price trends of that sector.

The position of each sector is determined by comparing the current sector price to a moving exponential average, meaning that LSC essentially applies a momentum investment strategy to commodities. The result is an asset that exhibits a strong inverse relationship with equities: the correlation between SPY and LSC since the launch in June 2008 approaches -0.75.

2. iShares Diversified Alternatives Trust (ALT )

This fund represents one of iShares first ventures outside traditional beta ETFs, and is not designed to track the performance of any index or other benchmark. The objective of ALT is to maximize absolute returns from investments with historically low correlation to traditional asset classes while also controlling the risks and volatility inherent in futures and forward contracts. ALT maintains the latitude to invest in equities, fixed income, currencies, and commodities while utilizing three primary strategies. yield and futures curve arbitrage, technical momentum/reversal, and fundamental relative value.

ALT is a relatively young fund (it was launched in November 2009), but so far it has been relatively efficient at accomplishing its stated objectives, exhibiting a correlation with SPY of nearly zero. One drawback: ALTs diversification comes at a price, as this product charges an expense ratio of 0.95%.

1. IndexIQ CPI Inflation Hedged ETF (CPI )

The cleverly-named CPI is one of the latest products from IndexIQ. a pioneer in the alternative ETF space. CPI is linked to the Inflation Hedged Index, a benchmark that seeks to provide a hedge against the U.S. inflation rate by providing a “real return” or a return above the rate of inflation, as represented by the Consumer Price Index.

While CPI is obviously of interest to investors concerned about protecting their assets from the ravages of inflation (see Beyond TIP: 10 ETFs To Protect Against Inflation ), it may also be useful for those looking to add uncorrelated holdings to a traditional stock-and-bond portfolio. Like the iShares fund discussed above, CPI has a relatively short history but has so far indicated its potential as a diversifying portfolio component. Since its launch late last year, correlation with SPY has been slightly negative.

Disclosure: No positions at time of writing.