Investors in the younger demographic may take a more aggressive approach to long-term investments and overweight riskier assets, such as broad U.S. and international equity exchange traded funds.
For instance, Christine Benz, Morningstar‘s director of personal finance, believes investors who are shooting for retirement near 2055 should take a heavy position in broad equities and a small position in diversified commodities.
Specifically, Benz outlines a portfolio of 50% broad U.S. market stocks, 10% small-cap value stocks, 30% developed international stocks, 5% emerging market stocks and 5% commodities. [Grandparents: Use These ETF for the Grandkids’ College Fund]
With ETFs, investors are able to gain broad market exposure through a single investment vehicle. For broad U.S. market exposure, the Vanguard Total Stock Market ETF (NYSEArca: VTI), Schwab U.S. Broad Market ETF (NYSEArca: SCHB) and iShares Core S&P Total US Stock Market ETF (NYSEArca: ITOT) essentially cover the U.S. stock market. [Broad Stock ETFs for a Passive Allocation Investment Strategy]
VTI covers the broadest selection with over 3,700 component holdings, SCHB is slightly less liquid and targets about 2,500 stocks and ITOT includes the largest 1,500 companies. SCHB, though, is the cheapest with a 0.04% expense ratio, VTI has a 0.05% expense ratio and ITOT has a 0.07% expense ratio. [Build a Dirt-Cheap Portfolio With These ETFs]
The Vanguard Small-Cap Value ETF (NYSEArca: VBR) and iShares Russell 2000 Value Index (NYSEArca: IWN) both target small-cap value stocks, or small-capitalization company securities that trade at a lower price relative to its fundamentals. VBR is the cheapest at a 0.09% expense ratio, while IWN has a 0.25% expense ratio. However, IWN tilts more toward smaller company stocks and less exposure to mid-caps than VBR.
Looking overseas, the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA), with a 0.09% expense ratio, covers developed markets outside of North America. The iShares Core MSCI EAFE ETF (NYSEArca: IEFA), which has a 0.14% expense ratio, tracks a similar group as VEA, except it excludes South Korea since the MSCI Index categorizes the country as emerging. Additionally, Schwab International Equity (NYSEArca: SCHF), with a dirt cheap 0.08% expense ratio, includes the same group, along with Canadian stocks.
The iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI EM Index, and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which reflects the performance of the FTSE Emerging Index, are the two largest emerging market-related ETFs on the market. VWO, though, excludes South Korea since FTSE categorizes the country as developed. VWO has a 0.15% expense ratio and EEM has a 0.67% expense ratio.
Lastly, for commodities exposure, the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) follows an equal-weight methodology for its 17 commodity positions. In addition, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest commodity-related ETF and tracks a broad basket of the 14 most heavily traded commodities, uses an optimum yield methodology that tries to limit the negative effects of contango. GCC and DBC have a 0.85% expense ratio.
“Note that these portfolios aren’t designed to shoot out the lights over short time frames,” Benz said. “Rather, the goal is to depict sensible asset-allocation mixes for investors at varying life stages.”
Nevertheless, one should not completely set-and-forget these types of portfolios. Over time, the portfolio positions can shift, so investors should not forget to annually, if not regularly, rebalance positions. [Don’t Forget to Rebalance Your ETF Portfolio]
For more information on investing toward retirement, visit our retirement category.
Max Chen contributed to this article.