A complete portfolio doesn’t have to consist of a chockful of asset classes spread across various parts of the globe for diversification. With a focus on cost nowadays, investors can build a minimal portfolio that accomplishes the basic needs of diversification via exchange-traded funds (ETFs)—in this case, just two ETFs will do.
“There’s a misconception that portfolios need to be complicated in order to be successful. You’ll often hear financial advisors and websites say that you need to combine 10 funds or more in order to achieve complete diversification,” wrote David Dierking in The Street. “Diversification isn’t based on the number of funds or ETFs you own. It’s based on market coverage. Using ETFs, you can easily achieve this coverage in as little as two funds.”
For one, investors can get worldwide equities exposure using the Vanguard Total World Stock Index Fund ETF Shares (VT)—a global exposure fund that essentially puts the whole world at the fingertips of ETF investors. VT seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world.
The fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap Index. The advisor attempts to sample the target index by investing all, or substantially all, of its assets in common stocks in the index and by holding a representative sample of securities that resembles the full index in terms of key risk factors and other characteristics.
“If you want complete equity market coverage, this is the ETF for you,” Dierking noted. “It invests in stocks across all regions – U.S., developed foreign markets and emerging markets – and all market caps. It owns nearly 9,000 stocks in total, but because it’s market cap-weighted, it’s tilted towards large-caps, such as Apple, Microsoft and Alibaba.”
Next up is fixed income exposure using the Vanguard Total World Bond ETF (BNDW). BNDW seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index that measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds.
“BNDW is essentially the bond equivalent of VT,” wrote Dierking. “With one notable exception (which I’ll get to in a moment), it covers all corners of the fixed income market. It’s actually a fund of funds, comprising 50% allocations to the Vanguard Total Bond Market ETF and the Vanguard Total International Bond ETF.”
The one notable is a lack of exposure to high yield.
“The one notable missing segment of the fixed income market is junk bonds,” Dierking noted. “BNDW focuses entirely on the investment-grade market leaving a potential source of additional income off the table.”
For more market trends, visit ETF Trends.