The Only 5 ETFs You’ll Ever Need

by Lawrence Meyers | February 21, 2014 9:24 am

I get a lot of requests from young readers who are just starting out with their investments, and one of the simplest pieces of advice I can give is to embrace exchange-traded funds (ETFs).

Although I always preach the benefits of a long-term diversified portfolio when their asset base grows large enough, in the beginning I suggest five ETFs that are really the only funds you need to own for the long term.

As you get older and your portfolio has room for new additions, there are plenty of other ETFs and stocks to add. For those just starting out, however, I suggest the following ETFs:

ETFs to Buy: Vanguard Total Stock Market (VTI)

Vanguard Total Stock Market (VTI[1]) is where I would begin.

Simply put, few investments outperform the stock market over the very long term. Thus, the broad exposure of the Vanguard Total Stock Market ETF assures that you will reap the benefits of that long-term exposure to the entire American stock market.

VTI’s top holdings reads very similarly to the S&P 500’s, with Apple (AAPL[2]) and Exxon Mobil (XOM[3]) earning the greatest weights. But the Vanguard Total Stock Market ETF also has exposure to small- and midcap stocks, which has helped it outperform the S&P 500. That’s because these smaller stocks have more room for growth than the more mature large-cap peers.

VTI also is extremely friendly to the beginner investor because of its bargain-basement expense ratio of 0.05%, or just $5 annually for every $10,000 invested. The fund’s 1.8% in dividends will more than cover your costs.

ETFs to Buy: Vanguard Total International Stock Market (VXUS)

[4]Vanguard Total International Stock Market (VXUS[5]) is the global peer to Vanguard’s domestic ETF.

The ETF is geared to track the performance of the FTSE Global All Cap ex-US Index. Because you are already covered with domestic equities, this gives you exposure to the rest of the world.

Geographically, it is led by 16% exposure to the UK, 15.6% to Japan and 7.1% in Canada, but it also has emerging-market exposure, representing almost 17% of the VXUS’s holdings. As with small- and midcaps in the domestic portfolio, the expectation with VXUS is that emerging markets will provide better returns than the developed nations. However, those bigger, more sturdy companies — such as Nestle (NSRGY[6]) and Roche (RHHBY[7]) — help power a 2.85% dividend.

VXUS’s expense ratio is also very low for the exposure it provides, at just 0.16%.

ETFs to Buy: iShares Core Total U.S. Bond Market ETF (AGG)

iShares Core Total U.S. Bond Market ETF (AGG[8]) gives your portfolio exposure to the fixed-income area of the investing world via U.S. investment-grade bonds.

The AGG is a fairly conservative fund, with 36% in Treasuries, and 71% of its overall holdings rated AA+ or AAA by S&P. Meanwhile, 65% of the portfolio leans toward the shorter end of the maturity curve at 10 years and under, with the average maturity being a modest 6.78 years.

AGG is a nice, safe bond fund that won’t deliver big returns now, but as the Fed eases up on the QE pedal, rates will begin to rise and send AGG higher.

AGG costs a mere 0.08% in expenses and offers a current yield of 2.1%.

ETFs to Buy: Financial Select Sector SPDR (XLF)

The first three funds will take care of really broadening your portfolio; the next two are designed to give you a little concentration in other parts of the market that I believe are ripe with opportunity.

You can go a lot of ways with sector ETFs, but to begin with, I like the Financial SPDR (XLF[9]). The way I see it, financial services make the world go round. When you consider that everything humans do involves transactions, and the sheer number of companies that are somehow involved in the chain of financial transactions (the XLF holds roughly 80 of them), you begin to understand why I chose this ETF. Financials have their bumpy times, to be sure, but they always recover.

XLF top holdings include stocks such as Wells Fargo (WFC[10]) and JPMorgan Chase (JPM[11]) at just more than 8% each, but also Berkshire Hathaway (BRK.B[12]) — a stock I think you could buy and hold forever[13] — at 7.8%.

XLF charges 0.16% in expenses and yields 1.5% in dividends.

ETFs to Buy: Energy SPDR (XLE)

Finally, I like the other thing that makes the world go around, and that’s energy. The world will need oil well past our lifetimes, and while alternative energy is growing in use, significant adoption on a huge scale just isn’t realistic right now. There is no sign of oil prices cratering, and gasoline prices remain at historic highs.

The Energy SPDR (XLE[14]) is all about oil and natural gas, with its top 10 holdings — representing a pretty hefty 58% of assets — are 10 of the greatest energy companies in the world.We’re talking names like Exxon Mobil and Chevron (CVX[15]), which as a pair represent almost 30% of the fund’s total weight.

XLE yields 1.8% in dividends and matches the Financial SPDR in expenses at 0.16%.

As of this writing, Lawrence Meyers[16] was long BRK.B. He is president of PDL Broker, Inc.[17], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[18] and blogs about public policy, journalistic integrity, popular culture, and world affairs[19]. Contact him at pdlcapital66@gmail.com[20] and follow his tweets @ichabodscranium.

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