Diversification is a key theme in 2025, as investors look for ways to navigate market volatility. 

Major U.S. equity indexes started the year near record-high levels of concentration. This means that many investors are now in a position where they need to diversify their portfolios, as the trade that worked so well last year is not delivering the same returns in 2025.

An ideal way to think about diversification may be to consider how you want to manage volatility, Brian Hartigan, Invesco’s global head of ETFs & index investments, told VettaFi at Exchange. 

While risk-on investments like bitcoin, for example, promise diversification, they may also escalate volatility. Investors looking for diversification plays that may enhance risk-adjusted returns may instead look to international ETFs and factor ETFs.

Using International ETFs for Diversification

The international story is strong right now, Hartigan said, as tariffs are likely to be persistent for some time. International ETFs present an opportunity to take a view on the dollar, he added.

Two funds that may be worth consideration include the Invesco S&P International Developed Low Volatility ETF (IDLV) and the Invesco S&P Emerging Markets Low Volatility ETF (EELV).

IDLV is based on the S&P BMI International Developed Low Volatility Index. IDLV’s underlying index measures the realized volatility of the Index’s 200 constituents over the trailing 12 months and weights constituents so that the least volatile stocks receive the highest weights.

EELV provides exposure to the S&P BMI Emerging Markets Low Volatility Index, which consists of the 200 least volatile stocks of the S&P Emerging Plus LargeMidCap Index over the trailing 12 months.

Another interested international play could be Invesco China Technology ETF (CQQQ). The DeepSeek news that shook markets earlier this year also raised investor awareness that there’s another country that’s doing its own technology innovation, Hartigan said. 

Factor ETFs Can Enhance Diversification, Mitigate Volatility

Factor ETFs may also enhance diversification in portfolios right now. The Invesco S&P 500 Equal Weight ETF (RSP) saw tremendous flows in 2024, even as the factor ETF lagged growth strategies. The fund plays a role as a diversifier, and should hold up better in more complicated market environments — such as 2022.  

RSP tracks the S&P 500 Equal Weight Index, which effectively gives every security in the S&P 500 an equal weight at each quarterly rebalance. Equal-weighted strategies may provide diversification benefits and reduce concentration risk by weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index.

Despite low volatility being a top-performing factor year to date, the Invesco S&P 500 Low Volatility ETF (SPLV) may not be getting the attention it deserves.

SPLV is a useful tool for achieving more stability in portfolios to avoid big daily moves. The fund is based on the S&P 500 Low Volatility Index, which consists of the 100 securities from the S&P 500 Index with the lowest realized volatility over the past 12 months. 

See more: Equal-Weight RSP on Pace for Record Flows Year

For more news, information, and analysis, visit the Innovative ETFs Channel.