Is It Time To Give In And Buy Index-Based ETFs?

Includes: BND, VEU, VTI
by: Rob Ward

Most stock pickers cannot beat the market -- can you? Maybe you bought Apple (NASDAQ:AAPL) at $100 per share and sold at $700 and think you're a genius. Maybe you still own it and wonder when the stock will get back to its previous highs. Worse yet, maybe you jumped on the bandwagon at $700 and are scratching your head because you are down 25% on a company that keeps making billions, has billions in cash, and no debt.

Perhaps you owned some stock in a firearms manufacturer such as Smith & Wesson (SWHC) or Sturm, Ruger & Co. (NYSE:RGR) when the terrible events unfolded in Newtown, Conn. Lawmakers immediately started discussing gun reforms and you saw your stock go down more than 25% seemingly overnight.

These are just a couple of examples, but there are countless others. Add in transaction costs for buying and selling and the time spent doing research, and it all starts to sound like a lot of trouble. It might just be time to consider index-based ETFs.

A Few Examples

I am not trying to be an advertisement for Vanguard Funds, but they are hard to beat. Similar products are available from other companies.

1. Vanguard Total Stock Market ETF (NYSEARCA:VTI): This U.S.-based ETF contains over 3,000 individual stocks from large, mid-, and small caps. It pays a quarterly dividend that amounts to about 2% per year. The expense ratio is next to nothing at 0.06%. It has averaged a return of 2.3% over the past five years. The one-year return is 16.5%.

2. Vanguard Total Bond Market ETF (NYSEARCA:BND): With over 5,000 different bonds included, this ETF is very diversified. Two-thirds of the bonds are government bonds while the other one-third is corporate. There is a nice mix between long, intermediate, and short term with an average maturity of seven years. Monthly dividends are paid that yield around 1.6% annually. The expense ratio is just 0.10%. The ETF has averaged a 5.8% return over the last five years.

3. Vanguard FTSE All-World ex-U.S. ETF: This ETF includes over 2,000 international stocks from both developed and emerging markets. 75% is from developed countries in Europe, Canada, and the Pacific. 25% comes from emerging markets such as Brazil, South Africa, Mexico, and Chile. International stocks have had a rocky ride, but have made a comeback lately. The five-year annual return is -2.3%. The one-year return is much better at 18.7%. The expense ratio is 0.18%.


If you are like me, you probably think you can pick stocks better than you actually can. As boring as it may be, investing in a mixture of the three ETFs above could give you better results in the long run. You are not going to hit any home runs with this approach, but a bunch of singles and doubles might lead to an easy retirement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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