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.
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.
Better yet, most of these broad-based ETFs can be had for expense ratios of 0.10% or less. Yes, you can get a completely diversified long-term portfolio that costs less than $10 annually for every $10,000 invested. Not a bad deal!
The portfolio I have in mind contains just two ETFs - one stock fund and one bond fund. You can certainly additional ETFs to this core to overweight exposure to any specific area of the market, but these two funds alone will get the job done.
Vanguard Total World Stock ETF (VT)
If you want complete equity market coverage, this is the ETF for you. 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.
The 60% North American allocation is almost entirely the United States. The remaining allocation of 30% to developed markets and 10% to emerging markets is a nice spread of both risk reduction and return potential.
VT also comes with healthy allocation to the world's largest economies - Japan, China, Germany and the United Kingdom - but includes exposure to more than 40 countries overall.
The top holdings look a lot like the S&P 500 with foreign inclusions, such as Alibaba and Nestle. Tencent is also bubbling just below the top 10.
Overall, this is an incredibly diversified equity portfolio. It's underweight tech and overweight financials and cyclical sectors compared to the S&P 500, but you won't do much better than this ETF.
Vanguard Total World Bond ETF (BNDW)
BNDW is essentially the bond equivalent of VT. 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.
BNDW is mostly a 50-50 split between U.S. bonds and foreign developed market bonds, with a small allocation to emerging markets debt.
Again, the U.S. accounts for nearly half of the portfolio with other major markets, including Japan, France, Germany and the United Kingdom all sitting in the top 5.
Less than 1/3 of the bond portfolio overall comes from government or sovereign foreign debt. This is a little unusual in that most aggregate bond funds tend to focus more on government fixed income than corporate notes.
The one notable missing segment of the fixed income market is junk bonds. BNDW focuses entirely on the investment-grade market leaving a potential source of additional income off the table.
If you want to add some high yield bond exposure to this portfolio, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) or the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) would be ideal choices.
VT comes with an expense ratio of 0.08%, while BNDW comes slightly cheaper at 0.06%. Depending on how you want to tilt your portfolio between stocks and bonds, this ETF combo becomes one of the cheapest and simplest portfolios you can create.
Keep in mind that there's nothing wrong with adding funds to build around this core. If you want to lower international exposure, increase tech allocations, add high yield bonds or overweight dividend stocks, simply add funds that achieve those objectives.
But if you are just looking for a simple "set it and forget it" portfolio that can be held for decades, the VT/BNDW combo will do the job.
More ETF Research
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