Without question, iShares exchange-traded funds (ETFs) offer investors a wide variety of low-cost index funds, making iShares a good one-stop shop for building a diversified portfolio with the best ETFs to buy and hold for the long term.
Of course, there isn’t a one-size-fits all portfolio structure, but one that works well for most investment objectives is the core-and-satellite approach.
As the name implies, the investor begins with a core fund, which will receive the largest allocation, and then adds the satellites.
There is no perfect amount of funds to use, but a range between three and 10 is sufficient for most investors. Here is a model for a seven-fund portfolio with a moderate asset allocation:
- 30% Large-Cap Index (core holding)
- 10% Mid-Cap Index
- 10% Small-Cap Index
- 10% MSCI EAFE Index
- 10% Emerging Markets Index
- 25% Aggregate Bond Index
- 5% Gold
With these allocations and indices in mind, here are the seven best iShares ETFs to buy and hold to build this diversified portfolio.
Best ETFs to Buy and Hold: iShares Core S&P 500 (IVV)
Expenses: 0.04%
To lay the foundation of your portfolio, begin with the best core fund, iShares Core S&P 500 (IVV).
A rock-bottom expense ratio, good liquidity, and a very low tracking error make IVV one of the best S&P 500 index funds to own. The idea of using an S&P 500 index fund for a core holding is that this particular index is the benchmark for what most money managers call “the market.”
So, if you wanted to build a portfolio iShares ETFs that could potentially beat the market, while still maintaining smart diversification, you could start the IVV as a core and pick satellite iShares ETFs that have historically outperformed the S&P 500.
You might also pick sector ETFs that you believe can outperform the broader market indices over the time period for which you are investing.
Top holdings for IVV were recently Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN).
Best ETFs to Buy and Hold: iShares Russell Mid-Cap (IWR)
Expenses: 0.20%
Mid-cap stocks can help juice your portfolio’s long-term returns, and iShares Russell Mid-Cap (IWR) is an outstanding way to fill this space.
In fact, if you wanted to take an aggressive route, IWR could be a good choice for a core holding. Long-term returns for mid-cap stocks have historically edged out large-cap stocks, and mid-caps aren’t quite as volatile as small-cap stocks.
But in our portfolio model, and in a solid core-and-satellite mix, IWR makes a great satellite holding.
Although some of IWR’s 800-plus holdings are large-caps, the average market cap of 9.7 billion is much lower than that of the S&P 500 index. Therefore, you’ll find very little overlap with the holdings.
Top holdings for IWR are Prologis (PLD), Zoetis (ZTS) and Lam Research (LRCX).
Best ETFs to Buy and Hold: iShares Russell 2000 (IWM)
Expenses: 0.20%
To complete the total market cap exposure in combination with your large-cap and mid-cap iShares ETFs, you’ll want one of the best small-cap index funds on the market — the iShares Russell 2000 (IWM).
If you’re going to include small-, mid- and large-cap stocks, why not just buy a total stock market index fund? The short answer is that most funds like this are cap-weighted, which means the largest capitalizations get the highest allocation, and you end up with an index fund that acts very much like an S&P 500 index fund.
But when you control the allocation of large-, mid- and small-cap exposure, you get better diversification and potentially better returns in the long run.
Top holdings for IWM include Bluebird (BLUE), Exact Sciences (EXAS) and Nektar Therapeutics (NKTR).
Best ETFs to Buy and Hold: iShares MSCI EAFE (EFA)
Expenses: 0.33%
To gain exposure to Europe, Japan, Australia and developed Asia, one of the best ETFs is the iShares MSCI EAFE (EFA).
In total, this cap-weighted index fund holds large- and mid-cap stocks spanning across 21 developed markets, which account for about 40% of the world’s market capitalization. This fund does not hold U.S., Canadian, or emerging-market stocks, but you’ll get access to those through other iShares ETFs in this portfolio model.
Foreign funds provide diversification through exposure to international equities, and they can be good currency hedges. When the U.S. dollar is strong, the big foreign exporters benefit as U.S. exporters see cuts in profit.
Top holdings for EFA are Nestle (NSRGF), HSBC Holdings (HSBA) and Novartis (NVS).
Best ETFs to Buy and Hold: iShares MSCI Emerging Markets (EEM)
Expenses: 0.72%
For international equity exposure beyond the developed markets, you’ll need iShares MSCI Emerging Markets (EEM).
With an average market capitalization of 17.7 billion in U.S. dollars, the holdings of EEM are predominately large-cap stocks. Regional exposure is over two-thirds Greater Asia, in countries like China, Taiwan and India.
Like other satellite holdings in our model portfolio of iShares ETFs, EEM receives a relatively small allocation of 10%, which is sufficient for the higher relative risk and volatility of emerging markets stocks.
Top holdings of EEM are Tencent Holdings (TCEHY), Samsung and Alibaba (BABA).
Best ETFs to Buy and Hold: iShares Core US Aggregate Bond (AGG)
Expenses: 0.05%*
For a single bond ETF holding, you can’t go wrong with iShares Core US Aggregate Bond (AGG).
With AGG, you’ll get broad exposure to the U.S. fixed income market with more than 3,000 bond holdings. Most of the holdings are above investment-grade in credit quality, which keeps a lid on the market risk inherent with high-yield bonds, while maintaining low relative exposure to U.S. Treasuries, which will continue to provide extremely low yields in a low-rate, low-inflation environment.
In summary, with AGG, you cover the total bond market and get a good balance of risk, return and yield. If you want exposure to other bond categories, such as short-term bonds, long-term bonds, or high-yield bonds, you can add other satellite ETFs to the mix.
Rounding out AGG’s positive attributes is its rock-bottom expense ratio of 0.05%, which makes a difference in long-term returns for a bond fund.
*Net expense ratio after fee waiver through June 30, 2026
Best ETFs to Buy and Hold: iShares Gold Trust (IAU)
Expenses: 0.25%
Gold ETFs are a good way to add diversity to a balanced portfolio, and iShares Gold Trust (IAU) is one of the best in the universe of precious metals funds.
Although SPDR Gold Shares (GLD) has more assets and gets most of the gold-related press, you won’t find much different in design or makeup between GLD and IAU. However, the iShares ETF has a lower expense ratio, which tends to give it a performance edge — especially in the long run.
Although the difference in expenses is only 20 basis points, a simple performance comparison is all that is needed to see IAU’s edge over GLD. Year-to-date, IAU is down 1.2% in price, whereas GLD is down 1.3%. Longer-term differences are similar, with IAU consistently edging out GLD by 10 to 20 basis points.
To end our portfolio model of 7 iShares ETFs, long-term investors need only revisit allocations at least once per year to be sure they still fit investment objectives and to re-balance to the original target allocations.
[Ed’s Note: This article was originally published on Oct. 29, 2015, but we’re republishing it so our readers will continue to benefit from these still-solid iShares ETFs.]
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds IVV, IWM, EEM, AGG, and GLD for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
