One of the great things about exchange-traded funds (ETFs) is that they allow average investors to invest all over the world at a much lower cost than if they did it themselves. The advantage is even more pronounced when considering bonds and other fixed-income investments.
A great place to get this done for you is through one of the countless robo advisors that operate in the U.S., like Wealthfront or Betterment. You pay an annual management fee plus the embedded fees of the ETFs selected during the portfolio selection process and you’re off to the races.
For those who are a little more adventurous and want to do it themselves, I’ve gone ahead and built a portfolio of seven ETFs to buy that is weighted 60% equities and 40% bonds with at least 75% of the holdings outside the U.S.
By covering the world at an annual average expense of just 0.25%, not only do you get a geographically diversified portfolio of assets, but you get them at a really low price.
World ETFs to Buy: Vanguard Total Bond Market ETF (BND)
Expense Ratio: 0.05%, or $5 per $10,000 invested
I chose 60%/40% because that’s the traditional asset allocation once used almost exclusively by pension funds. Of course, with low interest rates and the rise of alternative assets, this allocation went out the window for most professionally managed portfolios.
However, if you’re a novice investor, it’s better than investing 100% of your assets in equities after more than eight years of a bull market.
The Vanguard Total Bond Market ETF (NYSEARCA:BND) tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which covers all kinds of fixed-income investments, including government bonds, corporate bonds, international dollar-denominated bonds and even mortgage- and asset-backed securities.
Since its inception in April 2007, it has had only had one year with a negative return — 2013, down 2.1% — providing investors with better than average downside protection.
Charging just 0.05%, it yields 2.5% at the moment and has a total return year to date of 3.3%. You’re not going to get rich, but you won’t lose your shirt either.
World ETFs to Buy: Vanguard Total International Bond ETF (BNDX)
Expense Ratio: 0.12%
Because I stated that 75% of the ETFs assets must be outside the U.S., my second of two fixed-income ETFs is the Vanguard Total International Bond ETF (NYSEARCA:BNDX) which tracks the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD hedged).
The top three countries in the portfolio by weight are Japan, France and Germany at 19.7%, 12.6%, and 9.8% respectively. Almost 71% of the bonds held are government-issued with corporate bonds accounting for 15.7% of the $8.5 billion in total assets.
Investing in a total of 4,556 bonds, the average duration of the holdings is 7.8 years, with all of them rated Baa or better. Started in May 2013, it’s up 1.9% year to date; it hasn’t had a down year yet.
If you’re looking for an ETF with a significant dividend yield, BNDX isn’t for you. Its current SEC yield is 0.8%, one third its U.S. stablemate.
World ETFs to Buy: Vanguard S&P 500 ETF (VOO)
Expense Ratio: 0.04%
If it’s good enough for Warren Buffett, the Vanguard S&P 500 ETF (NYSEARCA:VOO) is good enough for me.
That’s right, the Oracle of Omaha had a 10-year, $500,000 bet with hedge fund manager Ted Seides that the VOO would beat any five hedge fund picks of Seides’ liking over a decade.
Well, by September it was all over but the crying. Buffett’s index bet had beaten the hedge fund manager by a wide margin. showing that if you’re going to put an ETF portfolio together, it ought to be anchored by a low-fee fund like the VOO, which charges just 0.04% annually.
With the U.S. accounting for 50% of the world’s total market cap, it makes sense to have a decent-sized portion of your portfolio in an ETF that owns some of America’s largest public companies.
The ETF isn’t the biggest of the S&P 500 ETFs at $78 billion in total assets — SPDR S&P 500 ETF (NYSEARCA:SPY) is the largest ETF on the planet at $253 billion — but its fee is half SPY’s, so we’re going with VOO instead.
ETFs to Buy: SPDR Portfolio Small Cap ETF (SPSM)
Expense Ratio: 0.05%
The SPDR Portfolio Small Cap ETF (NYSEARCA:SPSM) tracks the performance of the Russell 2000 index and has 1,984 of the smallest publicly traded U.S. companies by market cap.
The SPSM uses a sampling strategy, which means it doesn’t have to own all of the stocks in the Russell 2000 but merely a group of companies that have the same risk and return characteristics. It currently has 1,658 holdings with a weighted average market cap of $2.2 billion, about $200 million greater than the index itself.
As you can imagine with an ETF that holds almost 1,700 stocks, you’re not getting a lot of any one company. The top ten holdings account for just 2.6% of the ETF’s $258 million in total net assets.
SPSM is up 11% year to date and 20.8% over the past 52 weeks. Since its inception in July 2013, it has underperformed the S&P 500 in three out of the four years but has provided similar returns to the S&P 500 over the longer-term because when it does well, it does well.
Any portfolio worth its salt has some players that hit singles and doubles (S&P 500) and others that hit home runs (Russell 2000). SPSM is the latter.
World ETFs to Buy: iShares Morningstar Mid-Cap ETF (JKG)
Expense Ratio: 0.25%
Mid-cap stocks are my favorite investment because they allow you to invest in growing companies that have attained a reasonable financial stature, which reduces the risk while producing better-than-average returns.
I picked the iShares Morningstar Mid-Cap ETF (NYSEARCA:JKG) because it has the perfect combination of holdings and management fees at 190 and 0.25% respectively. The top 50 holdings account for 46% of the ETF’s $779 million in total net assets, one of the higher percentages in the mid-cap category, providing a more focused portfolio at a reasonable management fee.
Since its inception in June 2004, JKG has a cumulative total return of 252%, or 10% on an annualized basis. Over the past ten years, it has outperformed both the S&P 500 (120 basis points) and the mid-cap blend category (191 basis points).
If I could only own one equity ETF, JKG would be it.
World ETFs to Buy: Vanguard FTSE Developed Markets ETF (VEA)
Expense Ratio: 0.07%
As I stated in the beginning, 75% of the investments in the ETFs I’ve selected must be outside the U.S. I’ve chosen 75% because U.S. companies have had a good run; it’s time for other countries to deliver market-beating returns.
The Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) casts a wide net, investing in 3,870 stocks including Japan, United Kingdom and Canada at 21.1%, 15.7% and 8.4% respectively. In the top ten holdings, you’ve got two oil companies, two healthcare companies and many household names that account for 9.8% of the ETF’s $98 billion in total net assets.
Previously, I mentioned that I like mid-cap stocks because they’re big enough to withstand economic downturns but small enough to still be in growth mode. VEA allocates 17% of assets to medium-sized companies, 40% more than the foreign large-blend category. The average market cap is still significant at $24 billion, but almost half the average for the category.
Year to date it’s up 23.3%, well better than the S&P 500. Long-term, I see VEA doing very well and possibly outperforming the S&P 500.
Most importantly, it’s hard not to like an ETF that covers the world for just 0.07%.
World ETFs to Buy: Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.14%
Just as it’s important to have small-cap stocks on your team, it’s also prudent to have some exposure to emerging markets. I’m not suggesting you go overboard; a small weighting should do.
To get you that exposure I’ve chosen the VEA’s stablemate, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) which tracks the performance of the FTSE Emerging Markets All Cap China A Inclusion Index, a group of 4,036 stocks from emerging markets around the world.
Despite the index’s deceptive name, China represents just 31.1% of the ETFs $62.3 billion in total net assets. Other countries with significant weightings include Taiwan, India, Brazil and South Africa at 14.9%, 11.4%, 8.6% and 7% respectively.
Even though VWO is investing in emerging markets, the stocks held in the ETF are reasonably large companies with a median market cap of $14.9 billion but also growing earnings by double digits.
VWO in combination with VEA makes a potent one-two, punch.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.