The More 'Complete' U.S. And International Stock And REIT Growth Portfolio

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Includes: AGG, BNDX, EMB, IEF, IJH, IVV, QQQ, REET, TLT, VEU, VNQ, VTI
by: Dale Roberts
Summary

Most investors have an incredible home bias as we are more comfortable owning companies that are known household names.

Many of us will also hold a market index ETF or replicate an index and in the process underweight the REIT sector.

For needed diversification and to maximize growth potential, US investors might be best served to increase REIT, plus international stock and bond exposure.

Here's a 9-ETF portfolio that captures a large percentage of the stocks, REITs, and bonds available on a global scale.

There may be 3 major portfolio opportunities that are largely missed by investors. These may be the biggest holes in our portfolio construction.

  1. International stock exposure
  2. International bond exposure, including developing markets
  3. REIT exposure

US and Canadian investors are well known for their home bias. Perhaps US investors can make more of a case for investing mostly or exclusively in US-based companies. After all, the US large cap and mega caps generate a considerable percentage of revenues and earnings overseas. There is some modest international exposure by way of the US large caps. The dividend writer and SA author Mike, The Dividend Guy, recently offered up International Dividend Stocks; Do You Really Need Them?

Here's a chart on US company revenues.

In that article, we also see that the US stock markets make up a considerable percentage of the total value of world markets. We can see that Canadian investors suffer with a massive underrepresentation of the markets and companies that are available. The Canadian markets also offer up incredible sector concentration in financials, energy and materials.

All said, as I had uncovered in a recent article, the US investor would have (historically) generated greater returns with a portfolio that included some international exposure. That's simply what the numbers show. This Table Suggests US Investors Would Be Well-Served By International Stock Funds. The US/international portfolio generated greater returns with less risk compared to an all-US portfolio.

I know it would be difficult to convince a US investor to invest half of their investment wealth in international stocks, but perhaps some modest exposure is more than prudent. Investors might consider that lost decade for US stocks.

Many investors also look past REITs. We might consider REITs a unique asset class (beyond a sector differentiator) that offers great growth potential and greater portfolio diversification. REITs are one of the best performing assets over the last 20 years and beyond. Yes, it's more than surprising to see gold and oil atop that list as well. The chart runs to end up 2018.

Given the returns potential and that added diversification, we'll include a distinct international REIT ETF.

Bonds, Foreign Bonds

Foreign bonds and especially developing market bonds are known as a wonderful portfolio diversifier that also typically will deliver much greater yield compared to US offerings. Of course, the idea is that there is greater risk and the investor is compensated with a higher yield. When I was researching the ETF portfolio models of the Canadian Robo Advisors, I would often hear of the benefits of those international and developing market bonds. In particular, ModernAdvisor who employs an active asset allocation model uses a generous developing market bond and stock component. Here's an example of a Balanced Portfolio.

And given the incredible growth potential of the developing markets, we'll also source a fund that offers that exposure. On that growth potential, here's Invest Like Wayne Gretzky, Skate To That Future Growth. The portfolio will also employ more US growth potential by way of size factor and the popular Invesco QQQ ETF (QQQ) that is more of a growth sector 'play'.

The 9 ETF World Growth ETF Portfolio

We begin with the Vanguard Total Stock Market ETF (VTI) that will offer some modest exposure to lesser caps. That said, it is a cap weighted fund and it is dominated by the top holdings, similar to the popular cap weighted S&P 500 funds (IVV). So we'll add direct exposure to the iShares Core S&P MidCap ETF (IJH) and the QQQ.

US real estate is covered by the Vanguard Real Estate ETF (VNQ).

If one seeks a Balanced Growth Model (75% stock area), they might use a broad base bond index fund (AGG) or perhaps they'd go the treasury route with (IEF) or the longer-dated (TLT).

For international markets, the Vanguard FTSE All-World ex-US ETF (VEU) covers the globe and offers near 22% developing markets exposure within the fund.

Global REITs are covered by the iShares Global REIT ETF (REET). Keep in mind that this global fund includes the US market. An investor may choose to not also include the direct modest exposure to the US market by way of VNQ. There can be some diversification benefits in holding that separate US REIT asset.

Foreign bonds are covered by the Vanguard Total International Bond ETF (BNDX) and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB). On developing market bond ETFs, here's what sets EMB apart courtesy of Strubel Investment Management.

This 9 ETF portfolio covers more of the investable assets around the globe. I was on a panel at the Inside ETFs Canada conference where panelist Mike Philbrick of ReSolve Asset Management suggested that the only 'true' passive portfolio is one that accesses the total world assets in exact percentages as they would appear on a world asset map. Any deviation is a bet.

Now we could certainly debate what is passive and what is active all day long. I offered some insights and thoughts in this article, Is this is the only truly passive portfolio? And being completely passive is not the goal of many investors. We all make bets, but Mike brings up a great point that when we deviate we are making a bet that an asset that we overweight will outperform other assets.

But more importantly, the argument that Mike presents and the portfolio 'suggestion' that Mike offers in that article shows that many of us exclude important assets around the globe. We might be able to create a more diversified portfolio with greater growth prospects by way of just a handful of ETFs.

What do you think? Are you ready to leave your home bias behind? Are you ready for greater diversification? How drastic is your home bias, and why?

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.

Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, BLK, WMT, UTX, LOW, NKE, TXN, PEP. 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.