4 ETF-Based Portfolios Give You The World For 7 Basis Points Or Less

The first will be unbelievably simple, while the 3 variants that mix in a few different ETFs will give you even greater diversification at lower cost.
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In my first two articles here on TheStreet.com, I covered an innovative new housing ETF as well as 6 Gold-Backed ETFs to consider for your portfolio.

In this third article, to help new readers get to know me a little better, I’d like to go all the way back to the basics, and explain why I decided to become ETF Monkey in the first place. In short, it was because I quickly came to appreciate the power of ETFs.

In this article, you won’t find a bunch of charts and graphs, or detailed historical performance analysis. Instead, my goal is to feature how an ETF-based portfolio can literally give you ‘the world’ at an amazingly low cost.

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Before we’re done, we are going to take a look at four such portfolios. The first will be unbelievably simple, and yet incredibly comprehensive and powerful. From there, we will look at 3 variants that mix in a few different ETFs, but give you even greater diversification at lower cost.

Portfolio One: Two ETFs

Let’s start with the simplest option. It is comprised of just two ETFs; Vanguard Total World Stock ETF (VT) and Vanguard Total World Bond ETF (BNDW).

A year or so ago, my colleague, David Dierking, wrote a nice article about this combo right here on this site. I double-checked, and nothing of any major significance has changed since that time. Instead of me reinventing the wheel, please, take a few minutes to review Dave’s article, and then we’ll press ahead with 3 additional options for your consideration.

Before we leave this section, however, allow me to introduce and explain a graphic that will be presented in all 4 sections of this article.

The graphic is simple. In the article title, I promised you 4 portfolios that would cost you “7 basis points or less.” I need to keep my word. In this iteration, then, I list the two ETFs along with their respective expense ratios. I then apply the desired weight of each and calculate the weighted, or overall expense ratio of the portfolio.

Screen Shot 2021-07-22 at 12.26.57 PM

“Hang on,” you’re thinking. “I see 7.2 basis points! What gives?”

As a default, I decided to use Peter L. Bernstein’s classic 60/40 weighting for this exercise. I will use the same overall 60/40 weighting for stocks vs. bonds for the remaining 3 iterations, for a truly “apples to apples” comparison. However, if you simply adjust the VT/BNDW weighting to 50/50, you come out at exactly 7 basis points! And, if you are at or near retirement age and feel more comfortable with a 40/60 or even 30/70 weighting, you end up a hair under 7 basis points.

Portfolio 2: Replicating Portfolio 1, But With 4 ETFs

In this version, we will feature the following ETFs:

  1. Vanguard Total Stock Market ETF (VTI)
  2. Vanguard FTSE All-World ex-US ETF (VXUS)
  3. Vanguard Total Bond Market ETF (BND)
  4. Vanguard Total International Bond ETF (BNDX)

In this version, VTI and VXUS team up to replace VT. Essentially, this version assumes you desire exposure to both U.S. and foreign stocks, but might like the ability to choose your desired weighting, or allocation, between the two.

As an example, you might believe foreign stocks are relatively cheap compared to their U.S. counterparts at this precise moment in time and look to overweight these. On the other hand, you might like to focus on U.S. stocks, with perhaps a modest weighting in foreign. Either way, with these two ETFs, you are in control.

As the name implies, VTI gives you exposure to the total U.S. stock market. As opposed to, for example, an S&P-500 based ETF, which limits its coverage to large-cap stocks, VTI covers the entire range of large-, mid-, and small-cap stocks.

Have a look at the graphic below.

Screen Shot 2021-07-22 at 12.29.05 PM

While the names in that top-10 list are doubtless recognizable to you, and in fact comprise 23.4% of the fund, you are also benefiting from the growth potential of small companies. As shown, some 3,908 companies are included.

Next, we turn our attention to VXUS.

Screen Shot 2021-07-22 at 12.31.01 PM

In this case, the ETF holds some 7,526 stocks. In the upper-left corner, note that it offers an allocation roughly 74% to developed markets, and 26% to emerging markets.

In general, a country is considered developed if it has a highly-developed capital market, competent and serious regulatory agencies, and high levels of per-capita income. Countries such as Japan, France, Germany and Australia, to name just a few, are considered to be developed markets.

Emerging economies, on the other hand, tend to be characterized by higher levels of economic, political, or social instability, lower per-capita income, and still-developing infrastructure. Countries such as India, South Africa, Brazil and Mexico, to name just a few, are considered to be emerging markets.

One last observation. VT, featured in Portfolio 1, contains exactly 9,074 stocks as of this writing. VTI and VXUS combined? Some 11,434 stocks. So, in combination, your diversification is slightly greater with the combination package.

Let’s now turn to the bond side of the equation, with BND and BNDX.

This one is actually most interesting. If you carefully reviewed Dave’s article, you might have caught the fact that BNDW, the featured bond ETF, is actually an “ETF of ETFs;” with BND and BNDX being the two sub-components.

So, here is BND.

Screen Shot 2021-07-22 at 12.32.37 PM


Screen Shot 2021-07-22 at 12.33.49 PM

Again, as the names imply, these ETFs are “total bond” ETFs, meaning they cover a completely diverse cross-section of bonds. Some are government-backed, others corporate bonds, and so forth. Between the two, over 16,000 bonds.

Some commonalities between the two? In both cases, a substantial portion of the portfolio is rated A or higher by rating agencies; roughly 85% in the case of BND and 77% in the case of BNDX. The duration (a measure of how much interest rate risk you are taking on) falls at roughly 7.5 years, assuming you do a 50/50 mix.

Finally, similar to the VTI/VXUS combination, as opposed to a set allocation between U.S. and foreign, as you get with BNDW, with BND/BNDX you can select your own allocation.

So how does this variant play out, in terms of overall expense ratio? Have a look, I think you will like what you see.

Screen Shot 2021-07-22 at 12.35.32 PM

To reiterate, I kept the same overall 60/40 weighting of stocks vs. bonds. In the spirit of full disclosure, I did not keep the U.S. vs. foreign allocations exactly the same as the VT/BNDW defaults. I ventured a guess that most U.S. investors would likely go with a bias to the U.S.

However, your eyes do not deceive you. Global diversification for under 5 basis points!

Portfolio Three: Adding In A Little Real Estate

For my third iteration, I kept the same basic starting point as portfolio 2. In this variant, however, I add in a little direct exposure to real estate. Some investors, including myself, very much like having some direct exposure to this asset class.

To do so, I added in two additional ETFs:

  1. Vanguard Real Estate ETF (VNQ)
  2. Hoya Capital Housing ETF (HOMZ)

VNQ is perhaps the best-known ETF that invests specifically in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property.

You’ll see this reflected in the portfolio composition section of the below graphic. VNQ owns everything from cell towers to shopping malls to downtown office space to apartments to . . . well . . . I think you get the picture.

Screen Shot 2021-07-22 at 12.36.59 PM

In contrast, HOMZ is a relative newcomer to the field. As featured in the opening paragraph of this article, I reviewed it a little less than a month ago, right on this site.

In this iteration, I decided on an overall weighting of 10% for real estate. I took that, in equal relative portions, from the other asset classes. So, VTI’s 40% became 36%, VXUS’s 20% became 18%, and so on. With my 10%, I decided to allocate 7.5% to venerable VNQ and 2.5% to relative newcomer HOMZ.

Why did I include HOMZ in this particular iteration? To offer a little food for thought. HOMZ carries an expense ratio of .30%. There are many quality ETFs available that carry expense ratios of .10% or less, as prominently featured in this article. But no other ETF does exactly what HOMZ does, at least not today. Should that .30% expense ratio automatically eliminate it from consideration?

Have a look.

Screen Shot 2021-07-22 at 12.38.40 PM

Take a look at that overall expense ratio. At .05835%, it is just a little higher than portfolio 2, and actually cheaper, overall, than portfolio 1.

The takeaway from portfolio 3, then? You can add in a modest portion even of a slightly more expensive ETF if it adds something unique and still come away with a very competitive overall portfolio, from an expense standpoint.

Portfolio 4: Gold!

For our fourth and last portfolio, I decided to work in a modest amount of gold. As featured in this recent article, gold has a low correlation to several other asset classes you might consider for your portfolio. As a result, it has the potential to lower your overall risk while maintaining a very competitive overall level of return.

How does this last one play out, from an expense standpoint? Again, see below.

Screen Shot 2021-07-22 at 12.40.18 PM

For this last iteration, I decided on a 6% weighting in gold. Then, similar to portfolio 3, I reduced the relative weighting of each other asset class to balance it all out.

Again, gold-backed ETFs carry a slightly higher expense ratio compared to some of the rock-bottom ratios for your more standard ETFs. With an expense ratio of .17%, however, Aberdeen Standard Physical Gold Shares ETF (SGOL) is one of the best of the bunch. As an added benefit, a portion of its physical gold is stored in Zurich, Switzerland, about as safe as something like this can get.

Even here, I managed to piece together an overall expense ratio lower than our starting point, the VT/BNDW combo.

Summary And Conclusion

So there you have it. Four ETF-based portfolios that give you the world for 7 basis points, or less. The simple VT/BNDW combo gives you an amazingly diverse, global portfolio. The remaining 3 iterations? They offer a slightly lower overall expense ratio, a little more flexibility to act in harmony with your personal decisions, and in some ways even greater diversification.

As always, whether you are a small investor just starting out, or a more established investor with a larger portfolio, I hope you have found something helpful here.

Whatever your final decisions, I wish you . . .

Happy Investing!

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