When you’re putting together a portfolio — whether you’re starting one tomorrow, or you’re looking to tinker with what you’ve got — there are a few basics that most investors aim for: U.S. stocks. International holdings. Fixed income.
Sure, you can put together a reasonably diverse portfolio by gobbling up a few individual stocks and bonds. But you could also put together a much more diversified portfolio — for cheaper — by simply buying a handful of index funds. Specifically, Vanguard ETFs come to mind, for a couple of reasons.
For one, the world of Vanguard ETFs is wide enough to cover most basic investing flavors. And because of its unique structure, Vanguard has been able to maintain its place among the lowest-cost fund providers in the game. And an added bonus if you actually have a brokerage account through Vanguard: You can buy Vanguard ETFs commission-free, meaning you’re only paying their annual expenses.
We’ll be looking at a seven-fund portfolio of Vanguard ETFs that should not only cover most of your basic bases but also give you a little-added growth and some heavy income, too. All told, this portfolio will cost an average of about 0.1% in annual expenses, which is taken right out of performance.
Compare that to what you would have to pay in expenses if you merely bought and sold one stock every year — on a cost of $5.95 per trade, and an order worth roughly $1,000, you’re looking at an “expense” of 1.19% for trading. And even a few basis points in fees can add up to a lot in the long run.
So, if you’re looking to build a basic portfolio from scratch or just fill in some gaps, here are seven Vanguard ETFs that will get the job done.
Vanguard ETFs: Vanguard S&P 500 ETF (VOO)
Expense Ratio: 0.04%, or $4 for every $10,000 invested
Any list of any funds you should buy to build a portfolio will ultimately include (and usually will begin with) the Vanguard S&P 500 ETF (VOO) or another fund that allows you to invest in the S&P 500.
Why? Because American large-cap stocks — think Apple (AAPL), Microsoft (MSFT) and other top holdings — provide one of the most even blends of safety, dividends and growth you can find.
And the S&P 500 does it better than most.
The VOO is tops for a couple of reasons. For one, it and the iShares Core S&P 500 ETF (IVV) are constructed slightly different than the SPDR S&P 500 ETF (SPY) in that VOO and IVV can use derivatives and other strategies to generate extra returns. (This can work both positively and negatively, though so far, it has worked out in favor of these two funds).
Moreover, VOO is cheaper than both the IVV and SPY, if only by just a couple of basis points. Those factors, in turn, have led to a slightly better return for the VOO since its inception in 2010.
Vanguard ETFs: Vanguard Small-Cap Growth ETF (VBK)
Expense Ratio: 0.07%
While the S&P 500 is a widespread index that covers a nice swath of America’s sectors and industries, it hardly captures the entire market.
Another piece of the American pie you should have exposure to is small-cap stocks — those punchy (albeit more risky) companies that propel your portfolio with performance, rather than payouts.
Vanguard actually has a few funds dedicated to small-cap stocks, including a blended fund (VB) and a value-oriented fund (VBR), but the Vanguard Small-Cap Growth ETF (VBK) best harnesses the nature of what small-caps are supposed to do for you:
VBK invests in companies like gaming company Take Two Interactive (TTWO) and Alnylam Pharmaceuticals (ALNY) — stocks that can deliver powerhouse performances, much like the respective 140% and 245% gains seen by TTWO and ALNY this year.
Over the long haul, this has been Vanguard’s most successful small-cap strategy, with VBK outdoing VB and VBR over five- and 10-year holding periods.
Vanguard ETFs: FTSE Developed Markets (VEA)
Expense Ratio: 0.07%
Now that you’ve gotten your red, white and blue taken care of, you also want to make sure you’re invested internationally as well.
After all, every now and then, the U.S. can slip into the doldrums.
The Vanguard FTSE Developed Markets ETF (VEA) is one of the cheapest possible ways to invest internationally. It’s also far from a perfect international spread. While you do end up investing in more than 1,400 stocks — pretty diversified as far as single-stock strength is concerned — you do so across just 22 countries, and even that exposure is pretty lopsided. Almost a quarter of the fund is invested in Japan. Another 15.7% is in the United Kingdom. Add in Canada, Switzerland, France and Germany, and nearly 70% of the fund is invested in just six countries!
But that’s not necessarily an argument against VEA. This Vanguard ETF focuses on developed (read: low-growth-but-relatively stable) markets, and there’s simply a limited number of them. Moreover, VEA is investing itself heavily in sturdy blue-chips such as Swiss consumer goods firm Nestle (NSRGY) and Netherlands energy titan Royal Dutch Shell (RDS.A, RDS.B), so while country exposure is somewhat skewed, you’re not taking on a boatload of questionable holdings.
That portfolio produces an attractive 3.2% dividend yield, and a low turnover rate of just 4.4% helps to keep trading fees from weighing the fund down.
As a note: More than 60% of VEA is invested in Europe alone, and considering the strength of the developed names in the region, you could do just as well by going all-in via the Vanguard FTSE Europe ETF (VGK), which yields about 30-40 basis points more and shares nine of its top 10 holdings with VEA.
Vanguard ETFs: Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.14%
So, you’ve got your developed markets – your Western European countries, Japan, Australia. You know what to expect. Their markets are about as transparent as you can ask out of markets. And there’s no significant fear of serious unrest sending these countries to the boiling point.
Emerging markets, however … well, they’re a bit more fun.
Essentially, emerging countries are believed to be a little less stable, be at risk for more corruption and have slightly less dependable markets than those in developed countries. But investors love them anyway, thanks to typically growing populations and gross domestic product that trump those of their developed brethren, thus creating a lot more opportunity for breakout stock performance.
So, whereas you’re depending on developed markets for global stability, you’re hoping that emerging markets deliver global growth.
The Vanguard FTSE Emerging Markets ETF (VWO) is Vanguard’s cheap, simple play on this theme, offering exposure to China, Taiwan, India, South Africa, Brazil and a few more emerging economies via more than a thousand stocks.
However, don’t let the term “emerging” have you thinking that VWO is a complete who’s who of crap shoots. Top holdings include established companies such as the “Chinese Facebook” Tencent (TCEHY) and chipmaker Taiwan Semiconductor (TSM).
Vanguard ETFs: Vanguard Total Bond Market ETF (BND)
Expense Ratio: 0.05%
How much exposure you should have to bonds is a matter of age and risk tolerance. But generally speaking, everyone should have at least some exposure to this asset class simply because of its usual lack of correlation to the stock market (so, diversification) and because bonds can provide a fairly reliable source of income.
While owning individual bonds is the surest way to get regular, dependable income (you’ll get the same amount of income during every regular payout), if you want to diversify your holdings, you’d need a hefty nest egg to be able to invest in the number of bonds it would take to match the exposure you gain through a bond fund.
The Vanguard Total Bond Market ETF (BND) is one of the cheapest ways to gain access to a large chunk of the bond world, with BND holding more than 7,600 bonds, from U.S. Treasuries to commercial bonds to foreign debt. The overall credit quality of the fund is extremely high thanks to a focus on Treasuries (42% of the fund) and other investment-grade debt.
BND is far from an income machine, but with the ETF yielding 2.46% currently, you’re at least earning a little more than the S&P 500.
Vanguard ETFs: Vanguard Health Care ETF (VHT)
Expense Ratio: 0.10%
Vanguard Health Care ETF (VHT) is one of two “nonessential” Vanguard ETF picks in this list. You can boast a fairly well-rounded portfolio by holding just the five funds we’ve already talked about, but if you’re looking for some extra oomph over the next few years, VHT should be in your portfolio as well.
The aging of the baby boomers is among the most well-trod investment mega-trends out there. In short, 80 million aging Americans are getting up there in age, and with that comes an increased need for a number medical products and services to help extend and improve the quality of boomers’ lives.
Vanguard Health Care is an extremely straightforward play on the space, offering investors exposure to Big Pharma, biotechnology companies, medical equipment makers, healthcare providers … the whole kit ‘n’ caboodle.
The fund does lean heaviest on the first two industries there, as shown in top VHT holdings such as Johnson & Johnson (JNJ), Pfizer (PFE) and Gilead Sciences (GILD). But you also see some top-10 love going to insurer UnitedHealth Group (UNH), as well as Medtronic (MDT), which makes medical devices such as stents and surgical instruments.
By investing in funds like the VOO and VWO, you already have a little exposure to this sector, but VHT is a way to get a little more weight and ride this trend higher.
Vanguard ETFs: Vanguard Long-Term Corporate Bond ETF (VCLT)
Expense Ratio: 0.07%
Like VHT, you’ll still have a well-rounded portfolio even if you never touch the Vanguard Long-Term Corporate Bond ETF (VCLT). But VCLT does offer one particularly attractive feature, especially for longer-term investors: high income.
VCLT holds the investment-grade debt of industrial, finance and utility companies primarily located in the U.S., though a few internationals make the cut as well. Also, this is long-term debt — most of it spanning between 10 and 30 years — which typically offers much higher yield thanks to the greater uncertainty of payback across that long a time span.
At 4.16% currently, VCLT is among the higher-yielding ETFs in the Vanguard stable, and if you’re looking for a cheap source of high yield to add to your portfolio, you could do a lot worse than VCLT.
Read more about the VCLT here.
[Ed’s Note: This article was originally published in September 2015, but has been updated to reflect changes in the funds.]
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long VOO. Follow him on Twitter at @KyleWoodley.