The 4 ETFs That Will Replace My Portfolio's Core (2024)

Nearly two years ago I wrote an article entitled My Retirement Portfolio Could Be Replaced With These 5 ETFs. At the time, the article was written basically to as an alternative concept to my portfolio (at that time) of individual stocks. We all tend to evolve as investors over time. Each of us are on our own journey, whether we're talking about investing or life in general. I know the focus of my life has evolved over the past few years. If you are interested in a summary my family's journey thus far, read about it HERE.

Over the past 2 years I have come to two important realizations, which encourage me to eventually rotate mostly out of individual stocks and to the portfolio outlined below. First and most importantly, there simply aren't that many companies around the world that deserve my family's capital. To be clear, I don't mean there aren't some reasonable values in the global equity markets. I am talking about companies that are so well run, and have amazingly sustainable competitive advantages, that I would commit to owning these companies for the next 20 or 30 years. Perhaps you think the idea of holding an investment for decades is a simplistic and illogical consideration, but I contend that it's exactly my intention when I invest in an individual company on the "long-term side" of our bifurcated portfolio. For that reason, in the future I will cap individual stock investments at 25% or 30% of our portfolio's value. It will be limited to companies that can compound my capital, and unlock value, for decades and I think those are few and far between.

The second consideration in proposing the portfolio outlined below, is my personal time commitment. Currently I have a day job and enjoy researching our individual stock investments, but we are moving toward semi retirement. I anticipate additional flexibility and travel in semi retirement, but I can't allow the time commitments of monitoring a portfolio of individual stock investments to get in the way our flexibility/freedom. That sounds too much like work. With those two considerations in mind, let's take a look at the ETF offerings below. (Note: the funds discussed are all Vanguard offerings, but there are also other low cost fund families to consider like Fidelity and T. Rowe Price.

Vanguard Total Stock Market ETF (VTI)

First up is Vanguard's Total Stock Market ETF, my proxy for exposure to domestic US companies. In the previous article I mentioned Vanguard's S&P 500 ETF (VOO). Several readers commented that Vanguard's Total Stock Market ETF might be a better alternative, because it includes both small and mid capitalization companies. After some thought, I agree. While this ETF is capitalization weighted, which in this case means it's heavily skewed toward the large cap companies of the S&P 500, it also gives me some exposure to the small and mid capitalization companies. I like the concept of this additional exposure, because the small and mid capitalization companies tend to be much more isolated from international troubles and get nearly all of their business within the United States. I like to think of this ETF as the S&P 500, with a little extra kick. Given so much diversification, it's hard to beat the annual expense ratio of 0.05%. Below is a snap shot of Vanguard's Total Stock Market ETF, from Vanguard's website. The companies in the portfolio represent a wide variety of industries.

Vanguard FTSE All World ex US ETF (VEU)

The next ETF would be Vanguard's FTSE All World ex US ETF. This fund includes stock in more than 2500 different companies around the world. The holdings are skewed to the largest capitalization companies, because of the fund's capitalization weighting. Also as a result of the fund's weighting, you probably recognize all of the names in the top 10 portfolio holdings. (Think Nestle (OTCPK:NSRGY), Royal Dutch Shell (RDS.A), Toyota (TM), and Unilever (UL)). In the graphic below, courtesy of Vanguard's website, you can see that this truly is a global fund. This is the type of diversification I expect from a capitalization weighted all world fund. Additionally, if you don't feel comfortable having a large weighting of emerging market companies in your portfolio you may be able to hit your desired asset allocation within the 17.5% of this fund that represents companies located in emerging market economies. The annual expense ratio of this fund is only 0.14%, which is paltry considering the diversification (and rebalancing efforts) achieved by owning this fund.

Vanguard FTSE Emerging Markets ETF (VWO)

If you are optimistic about the future of emerging market economies, you may want to add additional exposure to your portfolio by including something like Vanguard's FTSE Emerging Markets ETF. I own this fund, but be warned that everyone has a different definition of what an "emerging market" economy is. Some people think of frontier economies, like those found in Africa and the Middle East. Others think of countries like Brazil, Russia, India and China. I'm not here to tell you what the right answer is, but remember that some emerging market economies have been "emerging" for decades. Remember to dig into your fund's portfolio allocation, to be sure you are comfortable with what you are buying.

See the table below for a perfect case in point. This is the geographic distribution of Vanguard's FTSE Emerging Market ETF. A full 28.2% of the portfolio is comprised of businesses based in China, and 55.3 percent of the portfolio's companies are based in China, Taiwan, or India. I would prefer if the percentage of companies from those three countries was reduced somewhat, but overall I feel the diversification achieved by this fund fits my family's needs pretty well. For my annual expense ratio of 0.15%, I gain exposure to over 2500 different global companies. As a result of the difficulty gathering quality corporate information in many of these emerging economies, I have always used an ETF (and this one specifically) to purchase my desired allocation of emerging market companies.

Vanguard Total Bond Market ETF (BND)

There is a conversation raging right now about whether or not bond investors are being adequately compensated for the risks present in the bond market. That's a conversation for another day, although I will note that because I am still in my 30s and interest rates are so painfully low, I have not had any meaningful bond exposure in my portfolio for several years. Clearly this is an individual decision, and every investor is different. If however you would like exposure to more than 7700 bonds, for an annual expense ratio of 0.07%, Vanguard's Total Bond Market ETF may be for you. As you can see in the three tables below, courtesy of Vanguard's website, the vast majority of holdings are highly rated bonds. The bonds held in the portfolio are also from a variety of issuers and of varying duration. For simple and straight forward bond market exposure, Vanguard's Total Bond Market ETF is worth a look.

Specialty (Sector, County, and Asset) ETFs

It's amusing sometimes to look at all the different specialty ETFs and mutual funds currently being offered. While the typical investor has no need to invest in many of these funds, they are available if the investor so decides. Two specialty funds that come up in my conversations with readers are listed below, but rest assured that your own imagination is the only limit of fund offerings. If you want to invest in a socially responsible fund that only invests in women owned businesses in the former Soviet Union states, I'm sure there is a fund out there for you. I'm exaggerating to prove a point, but I assure you that there are literally thousands of specialty funds available to you, if you take the time to look for them. Remember that just because these funds exist, doesn't mean they are worthy of your hard earned capital.

Vanguard REIT ETF (VNQ)

In the current low interest rate environment, investors have been searching for yield anywhere they can get it. Many investors have turned to corporate dividends and distributions from REITs (real estate investment trusts) or MLPs (master limited partnerships). If you are interested in owning a basket of REITs, Vanguard's REIT ETF may be for you. For a 0.12% annual expense ratio, you gain exposure to 140+ different REITs. In the graphic below (courtesy of Vanguard's website) you can see the sector diversification offered within the fund, as well as the top ten fund holdings.

Vanguard Healthcare ETF (VHT)

Many investors are keen to take advantage of long term trends, such as aging demographics, and global healthcare issues. If you are looking for this type of exposure, Vanguard's Healthcare ETF is worth a look. For a low 0.12% annual expense ratio, you can gain exposure to over 330 companies within the healthcare industry. The distribution of those companies is shown in the graphic (courtesy of Vanguard's website) below, as are the funds top portfolio holdings.

In a future article I will write about my asset allocation goals for my portfolio, but I hope this article gave you an idea of several very sold ETFs offered within the Vanguard family of funds. (Other low cost fund families you may want to look at include Fidelity and T. Rowe Price). Given the impressive returns posted by equity markets around the world, I have been hesitant to shift all of our holdings over to passive index ETFs just yet. The reality is that I currently enjoy researching and picking individual stocks. Eventually I will not have the time, or desire, to spend so much time on our investments. At that time, having a core portfolio position in the group of ETFs mentioned here will be my best bet. I took an early step in that direction this summer, following China's massive sell off, when began accumulating a large position in Vanguard's Emerging Markets ETF. I still have a long way to go before I reach my desired asset allocations, but I am optimistic that better investment opportunities (and lower prices) will present themselves in the future.

Do you hold index funds or ETFs in your portfolio? Why or why not?

Disclosure: The only ETF mentioned that I currently own is VWO. I do own individual stocks included in some of the other ETFs. Please consult your investment professional to create an asset allocation mix that meets your specific needs. Mine is a fairly unusual case given my young age and mix of investment holdings. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any securities. I am not a financial professional. The information above is available at Vanguard.com.

Income Surfer