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7 Index Funds to Buy for a Buffett-Inspired Retirement Portfolio


Index funds - 7 Index Funds to Buy for a Buffett-Inspired Retirement Portfolio

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Almost like folklore, Warren Buffett’s argument that most investors are better off investing in low-cost index funds continues to grow in stature. 

Google “Warren Buffett S&P 500” and you come up with 21 million different results. One particular link from June suggests that if Warren Buffett listened to his advice, he’d be the wealthiest person on the planet, almost $81 billion richer.

How so?

The author, Ben Brown, argues that if Warren Buffett took his net worth in June 2010 of approximately $47 billion and dumped the entire amount into an S&P 500-tracking fund like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), his net worth would have been $154 billion as of June 2020, well ahead of his actual net worth. That is truly something to ponder. 

However, for those of you who want a little more, here are seven low-cost index funds that will get the job done while also providing a bit more diversification. All of the selections follow passive indices, are exchange-traded funds and charge no more than 0.2% annually. 

  • Vanguard Total Stock Market ETF (NYSEARCA:VTI)
  • Invesco QQQ ETF (NASDAQ:QQQ)
  • Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA)
  • iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG)
  • Schwab Short-Term U.S. Treasury ETF (NYSEARCA:SCHO)
  • BNY Mellon US Mid Cap Core Equity ETF (NYSEARCA:BKMC)
  • Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (BATS:GSEW)

Index Funds: Vanguard Total Stock Market ETF (VTI)

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Expense Ratio: 0.03%, or $3 on an initial $10,000 investment

Rather than lead off with an S&P 500 ETF, I thought I would reach a little wider to the VTI, which tracks the performance of the CRSP US Total Stock Market Index, and charges just 0.03%

For those who are not good with percentages, that’s $3 in fees for every $10,000 invested, or less than the price of a single cup of coffee. 

While the benchmark index represents 100% of the investable U.S. market, because it’s weighted by market capitalization, it’s a large-cap blend in disguise. The median market cap of the ETF’s $153.2 billion in total net assets is $104.1 billion, with the top 10 holdings accounting for 23.9% of the portfolio. 

According to Morningstar, small caps account for just 5.5% of the VTI, mid-caps another 17.7%, and large-cap stocks account for the rest.   

At 0.03%, you can’t beat it.  

Invesco QQQ ETF (QQQ)

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Expense Ratio: 0.2%

Of all the ETFs on this list, Invesco’s got the best presentation of any of the ETF providers. It’s hard to resist the QQQ given the pitch it throws at you:

  1. The second-best performing large-cap growth fund over the past 15 years through June 30;
  2. The second most traded ETF in the U.S. based on average daily volume; and
  3. Access to 100 of the most innovative U.S. technology companies. 

Tracking the performance of the Nasdaq 100 Index, the top 10 holdings are like a who’s who of technology names with Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) accounting for 36.1% of the ETF’s $136.3 billion in total net assets

As these tech stocks go, so goes the QQQ. 

Although QQQ, with a management expense ratio of 0.2%, barely qualifies for inclusion in this group of seven index funds, it’s worth the added expense. It’s always worth paying up for innovation.

Index Funds: Vanguard FTSE Developed Markets ETF (VEA)

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Expense Ratio: 0.05%

I wanted to select at least one index fund from seven different ETF providers. However, to gain exposure outside the U.S. while owning a fund that has a decent amount of assets and liquidity, I went with a second Vanguard product. 

VEA tracks the performance of the FTSE Developed All Cap ex US Index, which provides investors with a total of 3,989 stocks from more than 51 countries with less than 1% represented by U.S. companies. 

The ETF has total net assets of $71.9 billion and charges just 0.05% for geographic diversification. Vanguard generates slightly less than $40 million in annual fees for its trouble. Some investment managers make that much in a month. Vanguard, you would have to say, is a volume-driven operation. 

The median market cap of VEA is $28.5 billion or about one-quarter of the market cap of VTI, the large-cap ETF mentioned earlier. 

Its top 10 holdings account for just 10.7% of its total net assets. All but two — ASML Holding (NASDAQ:ASML) and BHP Group (NYSE:BHP) — are household names here in America. 

iShares Core MSCI Emerging Markets ETF (IEMG)

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Expense Ratio: 0.13%

Emerging markets are those countries that are in the process of becoming developed economies such as Canada and the U.S. Just as it’s important to invest in the developed markets of the world, it doesn’t hurt to put a percentage of an investment portfolio into emerging markets such as India and China. 

iShares’ emerging markets ETF tracks the performance of the MSCI Emerging Markets Investable Market Index. The ETF’s $55.5 billion in total net assets are invested across 2,477 stocks in 26 different countries

The ETF’s top three countries by weighting are China (38.8%), Taiwan (13.3%) and South Korea (12.1%). Its top three sectors by weighting are consumer discretionary (18.8%), information technology (17.4%) and financials (16.7%). 

IEMG’s top 10 holdings account for 27% of the ETF’s total net assets.  

Of the top 10, only three trade on a U.S.-listed stock exchange: Alibaba (NYSE:BABA), Taiwan Semiconductor (NYSE:TSM) and JD.com (NASDAQ:JD).

While growth in emerging markets isn’t expected to come easy in 2021, Vanguard believes the future is still bright for these up-and-coming economies of the world. I couldn’t agree more.

It charges a reasonable 0.13%.  

Index Funds: Schwab Short-Term U.S. Treasury ETF (SCHO)

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Expense Ratio: 0.05%

In addition to Warren Buffett’s recommendation investors put 90% of their portfolio in a low-cost index fund tracking the performance of the S&P 500, he also believes investors should consider putting 10% in short-term government bonds

Well, investing in U.S. Treasury bills with maturities between one and three years, certainly qualifies as reasonably short term. Tracking the performance of the Bloomberg Barclays US Treasury 1-3 Year Index, this Schwab ETF charges a low 0.05%

Consider SCHO your 10%. 

Because of the short-term nature of this fixed-income ETF, which holds 96 different treasuries, it’s managed to gather more than $7 billion in total net assets. The weighted average maturity of SCHO is two years, while the weighted average coupon is 1.79%. 

In existence since Aug. 5, 2010, SCHO has an annualized total return since inception of 1.24% through the end of July. You’re not going to get rich owning this ETF, but you won’t go broke either. 

Consider it your rainy-day fund. 

BNY Mellon US Mid Cap Core Equity ETF (BKMC)

Expense Ratio: 0.04%

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I have been a fan of mid-cap stocks for years. I like them because you’re investing in companies that have built their businesses to a particular scale but still have a decent amount of growth ahead of them. In November 2019, I picked 10 mid-cap dividend stocks to buy. The pandemic has hurt many of the names on my list. Long term, I’m confident they’ll bounce back nicely. 

In the meantime, as Buffett says, most investors are better off buying diversification. In this case, Bank of New York Mellon’s (NYSE:BNY) US Mid Cap Core Equity ETF should do the trick. 

BKMC tracks the performance of the Morningstar U.S. Mid Cap Index, a collection of 487 mid-cap stocks that represent approximately 20% of the investable universe of American companies. The ETF’s top 10 holdings account for just 6% of the $37 million in total net assets. I would have no problem owning any of the 10 stocks at the top.  

Only launched in April — not a great time to go out into the markets — the ETF rebalances four times a year in March, June, September and December, and reconstitutes its holdings twice a year in June and December. 

It charges a very reasonable 0.04% annually. 

Index Funds: Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW)

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Expense Ratio: 0.09%

Another favorite ETF flavor of mine is equal-weight ETFs. Generally rebalanced quarterly, they don’t get as top-heavy as market-weighted ETFs do. 

Take Amazon, for example. In many funds where it’s held, AMZN stock accounts for between 20%-30% of the portfolio. That’s great when things are going good for Amazon, as they are today. But if it ever hits a pothole, look out below. 

The argument against equal-weighted index funds is that they tend to overweight smaller companies making them more vulnerable in times of economic uncertainty. To offset these fears, I’ve selected Goldman Sachs’ equal-weight version of a large-cap equity ETF. 

In business since September 2017, GSEW has managed to gather more than $317 million in total net assets over the past three years in a very crowded market.

Tracking the performance of the Solactive US Large Cap Equal Weight Index, it specifically avoids concentrating its holdings in names such as Amazon. And it does so at just 0.09%. That’s very good for a fund that reconstitutes twice a year. 

The ETF has 496 holdings. This means that each holding starts each quarter with a 0.20% weighting. As I write this, its top 10 holdings account for just 2.2% of its overall portfolio. In this instance, diversification is truly present, unlike cap-weighted ETFs, which provide investors with a false sense of security. 

Long term, equal-weighted ETFs can deliver for investors. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/7-index-funds-to-buy-for-a-buffett-inspired-retirement-portfolio/.

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