There’s a reason why money continues to flow into exchange-traded funds (ETFs) and other indexed products. Passive and indexed portfolios take the guesswork out of market-timing decisions because index funds own all the stocks within a certain market segment. Buying index funds on a regular schedule and sticking to that plan is one of the best things you do for your portfolio. And when you add in the costs and tax benefits of index ETFs, you have a match made in heaven.
Leading the pack when it comes to index funds continues to be Vanguard.
As the creator of the original index fund, Vanguard has taken passive investing to the next level — offering some of the cheapest and broadest funds around. In fact, you can build an entire diversified portfolio that will outperform the vast bulk of investors using just five simple Vanguard ETFs.
For investors looking for a no-fuss portfolio, the following five Vanguard ETFs are all you need.
Vanguard ETFs to Buy: Vanguard Total Stock Market ETF (VTI)
Expense Ratio: 0.04%, or $4 per $10,000 invested annually.
Our five Vanguard ETF portfolio needs a great base, and that base comes from a hefty dose of U.S. equities. The United States is still the number one game in town when it comes to the world’s market and every portfolio needs to have plenty of exposure to top stocks like Exxon (NYSE:XOM) or Johnson & Johnson (NYSE:JNJ). But, a portfolio can benefit immensely from having plenty of exposure to small- and mid-cap stocks as well.
That’s why the Vanguard Total Stock Market ETF (NYSEARCA:VTI) is a powerful tool.
The ETF tracks the CRSP US Total Market Index — a measure of the entire U.S. stock market. That’s right. All of them. VTI currently holds more than 3,600 different stocks. The beauty is that it covers giants like the previously mentioned XOM and JNJ as well as absolute small-fries that you’ve never heard off. There’s no need to hold individual ETFs covering every corner of the market. It’s all here in VTI.
This simplicity of owning everything helps explain why investors have plowed more than $96 billion into the index fund.
By using VTI, investors can build a great base and do so for cheap. Expenses for VTI are basically free at just 0.04% or $4 per $10,000 invested.
Vanguard ETFs to Buy: Vanguard Total International Stock ETF (VXUS)
Expense Ratio: 0.11%
Because the U.S. is still top dog, many investors exhibit what’s called “hometown bias.” That is, they favor the market perhaps more than they should. But international stocks have a place in your portfolio. After all, you’re just as likely to drive a Japanese car or own a Korean appliance. Using Vanguard ETFs to eliminate this hometown bias and add a dash of international stocks is easy as pie. And the Vanguard Total International Stock ETF (NYSEARCA:VXUS) is the way to do it.
The best way to think about VXUS is that it’s the intentional version of the previously mentioned VTI. The fund tracks the FTSE Global All Cap ex US Index. This index covers 98% of the world’s non-U.S. markets, including markets in the European, Pacific, emerging markets and North American regions across the full market-cap spectrum, large-, mid- and small-cap stocks. At more than 6,000 different holdings, it VXUS holds it all.
And just like VTI, using the ETF makes adding a swath of international stocks a simple process. It helps eliminate bias with one ticker. Also, just like VTI, VXUS is super cheap to own at just 0.11% in expenses.
Vanguard ETFs to Buy: Vanguard Total Bond Market ETF (BND)
Expense Ratio: 0.05%
Stocks have long been the best place to generate returns over the long haul. But stocks do come with plenty of volatility. Indexing helps you overcome some of that jumpiness as does holding some bonds. And no matter what your age, having some bond exposure is good as portfolio ballast. Naturally, Vanguard ETFs have the fixed income sector on lock as well.
The Vanguard Total Bond Market ETF (NYSEARCA:BND) follows the investment grade section of the fixed income market. Think of that as firms with great credit scores. This includes both bonds issued from corporations as well as the U.S. government. The nearly 8,500 different bonds that BND holds provides plenty of diversification and basically eliminates bankruptcy risk. Moreover, those holdings have maturities between five and 10 years. This intermediate sweet spot tends to provide the best combination of yield and interest rate protection.
For that reason, BND makes a top choice for core portfolio. Investors can score some yield — currently 3.1% — and add a bit of fixed income ballast to a portfolio.
And like all Vanguard ETFs, BND is cheap to own. Expenses clock in at 0.05%.
Vanguard ETFs to Buy: Vanguard Total International Bond ETF (BNDX)
Expense Ratio: 0.05%
If investors are painfully underweight international stocks, then their holding in international bonds are non-existent.
Again, the shame here is that the majority of fixed income opportunities- both sovereign and corporate bonds- lie outside the U.S. With interest rates still in the basement, investors are leaving the opportunity to pick-up some extra yield on the table.
The Vanguard Total International Bond ETF (NASDAQ:BNDX) makes adding a dash of international bonds a snap.
The $11.4 billion BNDX tracks nearly 5,000 investment grade bonds. This includes government, government agency, corporate and securitized non-U.S. investment grade fixed-income investments all issued in currencies other than the U.S. dollar. The added benefit is that the fund is hedged against the U.S. dollar. That helps to protect against uncertainty in exchange rates. Investors are able to focus on strict performance rather than the effects of currency.
And that strategy seems to be working. BNX has managed to return about 4% since its inception. That’s pretty good for a steady set of bonds.
Vanguard ETFs to Buy: Vanguard Real Estate ETF (VNQ)
Expense Ratio: 0.12%
Finally, our low-cost Vanguard ETF portfolio needs some inflation protection, and we can get that through owning commercial real estate. Historically, real estate has been a great inflation hedge as rents are typically tied to interest rates and overall demand. Meanwhile, physical assets tend to hold up better in high- and hyper-inflation scenarios.
The easiest way to get exposure is through real estate investment trusts (REITs). And the easiest way to get exposure to REITs is through Vanguard ETFs.
The $30.2 billion Vanguard REIT Index ETF (NYSEARCA:VNQ) is the behemoth in the sector and is the largest index fund to cover REITs.
The fund is so large that it’s currently changing its underlying index to include a more broader definition of real estate firms. The newly tracked MSCI US Investable Market Real Estate 25/50 will include real estate management firms, additional sectors such as timber and data center properties as well as own real estate development firms. In the end, this is a good thing for investors and only heightens the ETF’s diversity benefits.
Given the inflation-fighting and income-generating potential of real estate, adding VNQ to our simple Vanguard ETFs portfolio makes a ton of sense.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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