As the new year approaches, a lot of people make financial resolutions, most of which include something along the lines of building a better core portfolio. Although it sounds difficult, exchange-traded funds can help you accomplish this without too much extra thought. Your core could the most important piece of your investment puzzle, and picking the right ETFs to buy will make finding this vital piece a much easier task as we head into the new year.
These workhorse funds, which feature a broad range of asset classes, are designed to do most of your portfolio’s heavy lifting. It’s where diversification rules and the power of compounding drives long-term returns. There’s plenty of research that shows that asset allocation through a strong core matters most when constructing a portfolio.
The problem is, most people’s core portfolios are chocked full of overpriced and underperforming mutual funds and other investment vehicles. They are missing out on the entire point of building a core portfolio.
This is where ETFs come in and save the day.
Thanks to their low-costs, index-hugging and broad holdings, ETFs make ideal selections to build a portfolio on. By owning just a few ETFs, you can construct a diversified portfolio that can carry you through retirement.
With that in mind, here are five ETFs to buy that can be used to construct an entire core portfolio.
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
Stocks, specifically U.S. stocks, are where most investors get the bulk of their returns from. After all, over the long haul, it’s hard to bet against the U.S. When it comes to your core portfolio, the idea is to think broad and all-encompassing. The iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT) is perfect for that.
ITOT tracks the S&P Total Market Index — formerly the S&P 1500. This index provides exposure to the entire U.S. stock market. That includes everything from mega-caps like Amazon (NASDAQ:AMZN) to the smallest of the small. Overall, ITOT’s nearly 3,420 holdings cover roughly 90% of the stocks domiciled in the U.S. This huge exposure makes a great ETF for your core U.S. stock allocation.
One ticker and you’re done.
The benefits of the fund don’t stop there. ITOT is an extremely low-cost option as well. Expenses for the ETF cost a virtually free 0.03% (just $3 per $10,000 invested). That allows ITOT to track its index better and produce higher returns than more costly index funds. And when you add in that ITOT is available to trade for free on many brokerage platforms, it costs even get lower. No wonder why more than $16 billion sits in the fund.
When it comes to building a core portfolio with funds, ITOT receives top marks among other ETFs to buy.
SPDR Portfolio Developed World ex-US ETF (SPDW)
ETFs have long been a great way to eliminate so-called home-town bias and branch out into international stocks. And never before has this been more important. Today, the global economy is a complex place and country of origin doesn’t necessarily reflect where a firm receives its revenues from. Just take a look around your home. There’s a good chance that at least one time is a foreign brand. To that end, having some international exposure in your core portfolio is good.
The SPDR Portfolio Developed World ex-US ETF (NYSE:SPDW) is one of the lowest cost ETFs to add that exposure. Expenses for the fund clock in at just 0.04%. That’s about half as expensive as other similar ETFs of this type.
For that low cost, investors get access to more than 1,700 different international stocks from nations like Germany, the U.K., France and Japan. Top holdings include household names like Nestle, Toyota (NYSE:TMC) and BP (NYSE:BP). And while the sheer number of holdings may not be as large as some international core ETFs to buy — the Vanguard Total International Stock ETF (NYSEARCA:VXUS) has more than 6,000 — SPDW’s holdings are spread pretty evenly around and still provide plenty of diversification benefits.
With its low costs, SPDW gets the nod for a great international core ETF.
The iShares Core MSCI Emerging Markets ETF (IEMG)
With their long-term growth profiles and low correlations to developed nations/the United States, emerging markets are now considered to be a part of a core portfolio. Here again, ETFs make adding a swath of them easy. The iShares MSCI Emerging Markets ETF (NYSE:EEM) remains one of the most popular emerging market ETFs to buy.
However, its slightly smaller sister fund — the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) — is actually the best ETF to buy for retail investors looking for broad exposure to these nations.
The reason comes down to index construction. The EEM uses a sampling approach to track its index. However, IEMG uses a full replication strategy. That means IEMG holds all the stocks in the MSCI Emerging Market Index. This means that IEMG has basically double the number of holdings versus EEM. The best part is that the fund also holds small- and mid-cap emerging stocks. This gives it a huge advantage over EEM in both returns and diversification.
That’s something that no other emerging market ETF currently does and this extra exposure to these smaller players make IEMG the best all-around core solution for investors. And since it’s part of iShares core line-up of funds, expenses remain cheap as well.
Expenses for IEMG clock in at 0.14% — much less than its twin EEM.
Vanguard Real Estate ETF (VNQ)
All portfolios can benefit from some inflation protection and one of the best ways to get that is through commercial real estate. One of the best ways to get that exposure is through ETFs that track real estate investment trusts (REITs). And there’s no better REIT ETF than the Vanguard Real Estate ETF (NYSEARCA:VNQ). The $30.1 billion VNQ is the behemoth in the sector and it is the largest index fund to cover REITs.
VNQ holds 184 equity REITs or those stocks that own and sometimes operate physical real estate. Because of its immense size, the ETF recently underwent an index transition that also allowed the fund to own real estate management firms, additional sectors such as timber and data center properties as well as real estate development firms. In the end, this is a good thing for investors and only heightens the ETF’s diversity benefits.
And that’s a good thing. More research continues to show that having a slog of real estate holdings in a core portfolio is a great way to boost returns and reduce overall risk. The VNQ continues to be one of the best ways to add that exposure.
As a Vanguard fund, expenses remain dirt cheap. VNQ will only cost you $12 per $10,000 invested. When it comes to core ETFs, the Vanguard Real Estate ETF is the way get exposure to the sector.
The Vanguard Total World Bond ETF (BNDW)
Despite the recent headwinds with interest rates, bonds do play an important part in a portfolio when it comes to diversification and smoothing returns. To that end, no matter what your age, bonds do have a place in a core portfolio. The best way to own them could be the new Vanguard Total World Bond ETF (NYSEARCA:BNDW).
That’s because BNDW owns everything. Seriously, everything. The ETF holds both U.S. and international bonds from governments, corporations and other agencies. It covers the full spectrum of short-, intermediate and long-dated maturities. All in all, the fund holds more than 14,000 different investment grade bonds. That’s a crazy number of holdings.
And it does it for a dirt cheap 0.09% in expenses.
The reason why its able to own all these bonds and keep expenses low is that BNDW is actually an ETF of ETFs. It holds the Vanguard Total Bond Market ETF (NYSEARCA:BND) and the Vanguard Total International Bond ETF (NYSEARCA:BNDX). Those are two top-notch bond ETFs on their own. By using BNDW, core portfolio investors can gain access to the total bond market with just one ticker rather than two. This can keep trading costs down and allows smaller investors better diversification.
With bonds being a needed component in core investing, the new ETF makes it easy to add all of them to a portfolio.
As of this writing, Aaron Levitt held a position in ITOT.