A Diversified ETF Portfolio

by: Enterprising Investor Forum

Some of our readers have asked us how we would go about constructing a diversified ETF portfolio. Naturally, it always depends on what your ultimate investing goals are, your age, what percentage of your liquid net-worth will be invested in the portfolio, etc, etc… However, we thought that we would offer our view on what we feel could be a starting-point for a well-balanced option.

First of all, since stocks outperform all other asset classes over the long-term (see post and graphs: here), we would aim to have a majority of the portfolio in stocks and would therefore opt for a 60/40 split vs. bonds. In terms of bonds, we would place half of the allocation in a total bond market ETF and split the rest between short-term and long-term bonds. You could also just place it all in the total bond market but since we would aim to slowly build up all of our positions by buying in  thirds, we would prefer to have more choice when entering the markets:

  • Vanguard Total Bond Market (NYSEARCA:BND): 20%
  • Vanguard Long-Term Bond (NYSEARCA:BLV): 10%
  • Vanguard Short-Term Bond (NYSEARCA:BSV): 10%

With the remaining 60% of the portfolio that we will invest in stocks, it is important to keep in mind that we want diversification and enough exposure to different markets that will allow us to slowly enter our positions depending on market swings and investment cycles. Naturally, as our readers know, we prefer small cap value (they outperform! see post and graphs here) - but generally speaking, we always try to focus on value.

Based on the above, we will complement the total US market with US small cap value and MSCI EAFE Value index that will give us international exposure.

  • Vanguard Total Stock Market (NYSEARCA:VTI): 15%
  • Vanguard Small Cap Value (NYSEARCA:VBR): 10%
  • IShares MSCI Value (NYSEARCA:EFV): 10%

Then we would add some emerging markets and here, apart from overall market diversification/exposure, we like to look for ETFs that hold not only Asian companies but also Russian and Brazilian oil (simply our preference based on our view of future mega-trends), Gazprom (OTCQX:GZPFY), Lukoil (OTCPK:LUKOY), Petrobras (NYSE:PBR),etc…:

  • Vanguard Emerging Markets (NYSEARCA:VWO): 5%

In conclusion, it is always worth having some real-estate in a diversified portfolio, also due to the stable dividend yield. Furthermore, taking into account a stream of dividend yield that would also allow you to rebalance the portfolio, we would look at high dividend payers and possibly (in the current situation) a financial preferred share ETF:

  • Vanguard SF REIT (NYSEARCA:VNQ): 10%
  • Vanguard High Dividend Yield (NYSEARCA:VYM): 5%
  • Powershares Exchange (NYSEARCA:PGF): 5%

We feel that ultimately you should try and have a stable 40% in bonds, 40% in the market and value stocks and 10% in real-estate and then you can try and be a little more opportunistic with the remaining 10% of the portfolio.

Please note that opinions and strategies vary and that this is just one option which we would be happy owning - not only in terms of mix, but also because of the low expense ratios and dividend yield.

Disclosure: none

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