Build a Diversified Investment Portfolio with Just Three ETFs
July 10th 2013 at 2:40pm by Tom Lydon
With over 1,400 exchange traded funds on the U.S. markets, picking the right one may be daunting. While you can get fancy with an investment portfolio, investors can still keep things simple as well.
Anna Prior for the Wall Street Journal points out that investors can take a back-to-basics approach and construct a very well-diversified portfolio with just three low-cost ETFs. [The Total Cost of Owning an ETF]
“In this atmosphere, where it’s so easy to get drawn into complicated and niche areas of the market, this is a good way to be disciplined,” Abby Woodham, a fund analyst at investment researcher Morningstar, said in the article.
When it comes to the basics, most financial advisors suggest diversified exposure in equities and fixed-income assets that encompass the global markets. [iShares: Want Lower Risk? Try to Diversify]
For instance, investors can hold cheap index-based ETFs such as the Vanguard Total Stock Market Index ETF (NYSEArca: VTI), which has a 0.05% expense ratio; Vanguard Total International Stock ETF (NYSEArca: VXUS), which has a 0.16% expense ratio; and Vanguard Total Bond Market ETF (NYSEArca: BND), which has a 0.10% expense ratio.. Overall, these three ETFs provide exposure to over 15,000 stock and bond components. [Why Retirees Are Turning to ETFs for $1 Million Goal]
“We would agree that this three-fund approach offers most investors a prudent, well-balanced, diversified portfolio at a low cost,” Vanguard spokesman John Woerth said in the article.
Similarly, investors can utilize other low-cost fund families, such as BlackRock’s iShares suite, including iShares Core S&P Total U.S. Stock Market (NYSEArca: ITOT), which has a 0.07% expense ratio; iShares Core MSCI Total International Stock (NYSEArca: IXUS), which has a 0.16% expense ratio; and iShares Core Total U.S. Bond Market (NYSEArca: AGG), which has a 0.08% expense ratio. Overall, the three ETFs hold a little over 6,700 securities.
Alternatively, Paul Nikolai, principal and director at wealth-management firm Aspiriant, suggests picking a global stock ETF, a global diversified bond ETF and supplement the investment portfolio with a small exposure to alternative assets, such as a 5% to 10% allocation to real estate or diversified commodities.
Moreover, investors would shift allocations in this “three-fund” strategy based on their own investment timeframe, overweighting stocks for a longer time horizon or moving into bonds with a shorter timeline.
Financial advisors also suggest investors should rebalance at least once a year if not quarterly.
“The biggest pitfall [for all investors who decide on an asset mix and invest accordingly] is behavioral, when people don’t want to rebalance,” Brad McMillan, chief investment officer at Commonwealth Financial Network, said in the article.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.