To build long-term wealth for the big-ticket items and retirement, you need to invest. Keeping your money in a CD paying 2% won’t cut it. So, if you’re an investor seeking a set-it-and-forget-it exchange-traded fund (ETF) portfolio, then low-fee, diversified index funds are your solution.
And with over 5,000 ETFs from which to choose, this list will help you prune your investment list.
This isn’t a two- or three-ETF portfolio but a smartly constructed group of funds that cover a range of investment styles, so that when small-caps are shining, you’re there to enjoy the run and when value stocks grow, you don’t miss out. The reason for broader diversification is that just as miniskirts go in and out of style, so do investment categories. For instance, if you only invest in an S&P 500 ETF, which is weighted toward large-cap stocks, for your U.S. allocation, then you’ll miss out when mid-caps win.
These long-term funds give a nod to the historical out-performance of both value and small cap stocks.
Fees and asset allocation have been shown to influence returns, so choosing lower-fee ETFs is a no-brainer. The percentages you assign to each of these funds depends upon your risk tolerance levels. Greater amounts of riskier stock assets typically lead to higher returns and greater ups and downs for your investment values. Tamer, more conservative investors lean toward greater percentages of fixed assets.
Set-it-and-Forget-it ETFs: Total Market U.S. Core Index ETF
Expense Ratio: 0.03%, or $3 annually per $10,000 invested.
First, choose a core holding that is the backbone of your U.S. equity investment. Many companies offer this standard, so choosing one with the lowest fees makes sense. I suggest the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT).
This fund tracks the S&P Total Market Index (TMI) and is a solid choice for low-cost exposure to the entire U.S. stock market. The fund seeks to mirror the returns of the overall U.S. stock market. This holding meets the objective of long term growth.
The top holdings in this fund include some well-known names like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and JPMorgan Chase & Co. (NYSE:JPM).
Set-it-and-Forget-it ETFs: Mid-Cap Value Index ETF
Expense Ratio: 0.07%
Value stocks have been shown to outperform over the long term. Additionally, it’s easier for mid-cap stocks to grow than their behemoth large- and mega-cap brethren. So my next suggestion is the Vanguard Mid-Cap Value ETF (NYSEARCA:VOE).
This value ETF tracks the performance of the CRSP Mid Cap Value Index, that measures the return of mid-capitalization value stocks. The fund earned a 10.63% annualized 10-year return. This is in contrast with the S&P 500 index 10-year annualized return of 9.02%.
The fund holds 25% financial stocks and includes Western Digital Corp (NASDAQ:WDC), M&T Bank Corporation (NYSE:MTB), Freeport-McMoRan Inc (NYSE:FCX) and Dr Pepper Snapple Group Inc (NYSE:DPS) among its top holdings.
Set-it-and-Forget-it ETFs: Small-Cap Value Index ETF
Expense Ratio: 0.07%
Similar to the value stock category, small-cap equities historically outperform large firms. By combining small-cap value stocks into one fund, you’re opening to door to the possibility of beating the S&P 500 over the long term. For that, try the Vanguard Small-Cap Value ETF (NYSEARCA:VBR).
VBR is another low-fee, passively managed Vanguard ETF. This fund tracks the performance of the CRSP US Small Cap Value index, that obviously measures the return of small cap value stocks. The fund returned 9.85% annualized over the past ten years, narrowly beating the 9.02% S&P 500 index performance. Like Vanguard’s mid-cap value fund, 31.6% of the holdings are concentrated in the financials sector. While 19% of the stocks belong to the industrials sector.
The top fund holdings include lesser-known names such as CDW (NASDAQ:CW), IDEX Corporation (NYSE:IEX), Steel Dynamics Inc. (NASDAQ:STLD), Leidos Holdings Inc (NYSE:LDOS) and Atmos Energy Corporation (NYSE:ATO).
Set-it-and-Forget-it ETFs: International ex-U.S. Index ETF
Expense Ratio: 0.11%
The U.S. is approximately 50% of world markets, so don’t make the mistake of short changing your international investment allocations. You could choose both a developed and developing markets fund or just one that covers the entire globe (except the U.S.). In this case, I suggest the FTSE All-World ex-U.S. Index ETF (NYSEARCA:VEU).
This international ETF tracks the FTSE All-World ex US index and is a handy way to get broad international exposure to both developed and emerging non-U.S. equity markets. The fund invests in a sample of the countries in the index with approximately 20% allocated to emerging markets. VEU owns approximately 2,700 stocks and is well-diversified across the globe. The ten-year average annualized returns of 3% are paltry, although the one-year return of 16.78% (as of April 30, 2018) helps explain the importance of diversification. You can’t predict which investment classes will outperform and which ones will lag.
The top holdings include many well known global brands including Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B), Tencent Holding (OTCMKTS:TCEHY), Samsung (OTCMKTS:SSNLF) and Nestle SA (OTCMKTS:NSRGY).
Set-it-and-Forget-it ETFs: International Small Cap Index ETF
Expense Ratio: 0.4%
To hone in on the international firms with a chance for the greatest growth, go with an international small cap fund. SPDR S&P Small Cap International ETF (NYSEARCA:GWX).
This fund attempts to track the returns of the S&P® Developed Ex-U.S. Under USD2 Billion Index. This fund is a solid strategy to capture the returns of developed market, international stocks and owns 3,360 company stocks. Ten year returns of 5.1% beat those of the more diversified all world international (ex U.S.) fund of 2.4%. And like VEU, one-year returns of 17.4% were stellar.
The top holdings are a mix of familiar and lesser known companies like; Nikon Holdings Co. Ltd. (OTCMKTS:NINOY), SillaJen Inc. and Colliers International Group Inc (NASDAQ:CIGI).
Set-it-and-Forget-it ETFs: Short Term Bond ETF
Expense Ratio: 0.07%
Bond investing is tricky during a rising-interest-rate environment. As interest rates rise, bond values fall. That’s why it’s best to tilt your current bond investing to short term issues. This is the only ETF category where you might add a broader-based bond ETF, after interest rates stabilize. Try the Vanguard Short Term Bond ETF (NYSEARCA:BSV).
This fund tracks the Bloomberg Barclays U.S. 1-5 Year Government/Credit Float Adjusted Index that includes investment-grade bonds with average maturity of one to five years. The bonds include both U.S. government and investment-grade corporate bonds.
The fund’s 2.08% annualized ten-year return reflects the recent low-interest-rate environment.
Set-it-and-Forget-it ETFs: Real Estate Investment Trust (REIT) Index ETF
Expense Ratio: 0.07%
Unless you own investment real estate, it’s a good idea to include an REIT fund in your investment portfolio. REITs typically pay out 90% of their income in dividends and offer solid cash flow. The real estate asset class also adds diversification beyond stocks and bonds. Here, try the Schwab US REIT ETF (NYSEARCA:SCHH).
This low-fee Schwab REIT fund tracks the total return of the Dow Jones US. Select REIT IndexTM. The diversified real estate fund holds shares in many larger REIT companies, that focus on narrower niches. The return since inception in January 2011 is 8.8%. The top holdings include Simon Property Group Inc (NYSE:SPG), Public Storage (NYSE:PSA), AvalonBay Communities Inc (NYSE:AVB) and Ventas, Inc. (NYSE:VTR).
These ETFs are ideal for a lazy investment portfolio. If you want to get fancier, you can add in international REIT and more diverse bond funds. Finally, choose ETFs from these basic asset classes in your desired percentages and you’ve got a solid long-term investing strategy.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, Friedberg owned shares in the following ETFs – VBR and GWX.