A friend of mine came to me for advice, asking for an all-ETF low maintenance portfolio well balanced between asset classes.
He is 35 has $30,000 to invest and plans to put aside around $500 a month in this portfolio for the next 5 years at least.
His goals were capital appreciation, outperforming the indexes, regular dividends and international exposure, including emerging markets, with a moderate risk profile.
Moreover, since his bank offers an ETF automatic investment plan that costs $15 a month for up to 7 funds at a time, he asked whether this could be attained with no more than 7 ETFs.
At first I told him he was asking for the moon. Yet, after scouring through the hundreds of funds on the market, I came up with something quite close.
First of all I worked on asset allocation: 55% in stocks, 15% in REITs and 30% in bonds seemed reasonable to me.
As for stocks, since he didn't ask for specific sectors or countries, I began looking for funds that offered the broadest exposure possible at the lowest fees, so I deemed Vanguard's ETFs would do.
I chose Vanguard Total Stock Market (VTI) for US stocks, Vanguard Europe Pacific (VEA) for European and Pacific developed countries, and Vanguard Emerging Markets (VWO) for emerging markets, which I decided to overweight for capital appreciation.
These three Vanguard funds hold thousands of stocks each, are very liquid and charge the lowest expense ratios on the market.
I thought international REITs were the best option and, using Seeking Alpha's ETF selector, I came up with a handful to choose from.
A quick comparison made me go for WisdomTree International REITs (DRW): it comprises 224 stocks for maximum diversification, has a higher dividend yield and charges a lower fee than the competition.
Finally I had to pick up one or two bond funds. My first choice was Vanguard Total Bond Market (BND); once again, Vanguard offers a very diversified fund, with thousands of securities at a very low price.
Next, I added PowerShares Emerging Market Sovereign (PCY) for exposure to emerging markets bonds. The added risk is compensated by an average dividend yield north of 6%.
Investment U has a great article making the case for emerging markets bonds.
I thought that the six funds above were the best I could offer my friend, but I decided to add another ETF to reach the magical number 7.
And here came the toughest job: what should I go for? Smallcaps? Alternative energy? Commodities?
After thinking for a while what my best option could be, it dawned on me Claymore/Zacks sector rotation fund was the solution, so I picked Claymore/Zacks Sector Rotation (XRO) to complete the list.
So here it is:
- Vanguard Total Stock Market (VTI): 15%
- Vanguard Europe Pacific (VEA): 15%
- Vanguard Emerging Markets (VWO): 15%
- WisdomTree International REITs (DRW): 15%
- Vanguard Total Bond Market (BND): 15%
- PowerShares Emerging Market Sovereign Debt (PCY): 15%
- Claymore/Zacks Sector Rotation (XRO): 10%
This portfolio has a reasonable expense ratio of 0.31%, pays a generous 3.3% dividend and an empirical back test shows it would have outperformed the S&P 500 (SPY) by more than 52% over the past 5 years.
Disclosure: none
