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A Core Portfolio Of ETFs – For Everyone

|Includes: GNR, IEFA, SCHM, VOO, Vanguard Total World Stock ETF (VT), VTWO, VWO

Summary

Advantages of investing in a core portfolio of ETFs.

An example of a core portfolio of ETFs.

How to set up a core portfolio of ETFs.

Other considerations.

 

Advantages of investing in a core portfolio of ETFs

A core portfolio of ETFs is quick and simple to set up and manage.  An investor must decide which asset classes to include in a core ETF portfolio, the ETFs to use for each asset class and the percentage of their portfolio to allocate to each fund.  The investor should then determine the period of time to invest the funds and how often to rebalance the portfolio and realize available tax losses.

A core portfolio of ETFs should outperform other investment methods over the long term.  An investor that has a financial situation and risk tolerance to allocate funds and keep those funds invested consistently for the long term, should benefit from the higher return expected from a core portfolio of ETFs.  A core portfolio of ETFs should improve an investor’s results compared to using a full-service broker, asset fee-based investment manager, mutual funds or picking individual stocks.  A core ETF portfolio should be well diversified and beat these other investing methods over time by a significant amount.  In general, full-service brokers charge 1.0% of assets and then sell mutual funds that charge another 1.0% and underperform the market by another 1.0%.  Asset based investment managers typically charge fees of approximately 1.2% and under-perform the market by another 1.0%.  Individual stock picking requires holding stocks long term to allow capital to compound while delaying the payment of taxes.  Some stock pickers do beat the market on a before-tax basis over a period of time; however, over the long term, many studies have shown that the great majority of stock pickers underperform the market on a before-tax basis and underperform the market even more on an after-tax basis. 

A core portfolio of ETFs should reduce an investor’s worry about their investment results.  A core portfolio of ETF’s enables the investor to achieve a great amount of diversification at very little cost, which should reduce the volatility of the investor’s returns.

Example of a Core Portfolio of ETFs

Sector

Allocation %

ETF Ticker

Fund Name

Expense Ratio

Large cap US stocks

17%

VOO

Vanguard S&P 500 ETF

0.04%

Mid cap US stocks

17%

SCHM

Schwab U.S. Mid-Cap ETF

0.05%

Small cap US stocks

16%

VTWO

Vanguard Russell 2000 ETF

0.15%

Multi cap foreign developed market stocks

20%

IEFA

iShares Core MSCI EAFE ETF

0.08%

Multi cap emerging market stocks

20%

VWO

Vanguard FTSE Emerging Markets ETF

0.14%

Natural Resources

10%

GNR

SPDR® S&P® Global Natural Resources ETF

0.40%

 

The example core ETF portfolio, shown above, is a simple asset allocation to six ETFs that the author uses.  Although simple, it is still extremely well diversified, with 50% allocated to US equities (large, mid and small capitalization), 40% allocated to foreign equities (developed and emerging market) and 10% allocated to natural resources.  With the exception of GNR, each of these ETFs consists of hundreds or thousands of individual stocks. 

All individual investors have a different comfort level with different asset classes and current price levels.  The intent of this article is to explain the advantages of a core ETF portfolio and the decisions required to set up a core ETF portfolio, without going into detail about the possible asset classes and ETFs that can be considered for the portfolio.  The author has reviewed many of these options in previous articles and intends to update analyses of the potential investment options for the core ETF portfolio in future Seeking Alpha articles.

How to set up a core portfolio of ETFs

A core portfolio of ETFs is quick and easy to set up and manage. The core portfolio above, may work for some investors.  Another example is Seeking Alpha’s core ETF portfolio.  The steps required to set up a core ETF portfolio are as follows:

  • Decide what percentage of investments to allocate to the core ETF portfolio and what to cash, fixed income, real estate, and other investments.
  • Decide which asset classes to include in the core ETF portfolio.
  • Decide which ETFs to use for each asset class.
  • Decide the percentage of the portfolio to allocate to each fund. 
  • Decide how often to rebalance the portfolio and realize any available tax losses.
  • Decide whether to invest all at once, or over what period of time, to invest the available funds.
  • Purchase the ETFs for your core portfolio of ETFs.

Although there are a number of decisions that should be made up front, many investors have already made some of these decisions and the remaining decisions can take very little time and effort.  An investor that has a set amount of money that they want to invest all at once in the example portfolio described in this article and does not want to rebalance, can do it in a matter of minutes and be done – potentially forever.  Other investors may want to do a significant amount of research and analysis before making any decision and may want to rebalance and take tax losses regularly.  The investment process can be extremely quick, simple and relatively worry-free or as complex as an investor wants to make it.

Other Considerations

Most investors should have some quantity of cash and fixed income investments and many will have real estate and other investments as well.  An individual’s entire financial situation and risk tolerance should be considered when determining allocations to these asset classes, as well as a core portfolio of ETFs.

An investor that is just starting out or that has limited funds may want to minimize complexity and trading commissions by starting their core ETF portfolio with just one very broadly diversified ETF.  If starting with just one ETF, Vanguard Total World Stock ETF (VT) may be a good choice.

Investors that already have equity investments that they plan to sell to create a core ETF portfolio, need to consider the tax consequences of these sales.  It may be more tax efficient to sell investments in retirement accounts and set up the core portfolio of ETFs in that retirement account, or to use new investment funds in a taxable account, rather than selling investments that have appreciated in taxable accounts.

Although the US stock market and stock markets around the world have fallen recently, they remain at the high end of historical valuations.  This should be considered when determining when to invest new funds into the market.

A core portfolio of ETFs does not stop an investor from allocating funds to individual stocks or any other investments.  Many investors enjoy the investment analysis process and looking for the next Starbucks, Amazon or Tesla.  Setting up a core portfolio of ETFs that is relatively simple, worry-free and with less volatility, allows an investor to focus on their other investments.

Conclusion

A core portfolio of ETFs is quick and simple to set up and manage.  Over the long term, a core ETF portfolio should require less time, effort and worry, while providing a better after-tax return, with less volatility, than other equity investment methods.

Addendum

Further reading on the subject

  • ETF Investing Guide – Written by Seeking Alpha’s Founder in 2006 is a great guide for setting up a portfolio of ETFs.

The following articles were written by the author in January and February of 2016.  Seeking Alpha has made these available exclusively to Pro subscribers.  The author plans to write new Seeking Alpha articles on the investments included in the example core ETF portfolio that will be available to all readers.

  • Set Up A Core ETF Portfolio Now – Describes the four steps required to implement the suggestions in the ETF Investing Guide.  The ETF Investing Guide is made up of 54 articles and takes some time to read and assimilate the information.  This article condenses the information from the guide down to four steps that can be completed to set up a core ETF portfolio in around four hours.

Simply Investing - Philosophy

Establishing a core portfolio in well-diversified, low expense ETFs, held for the long term, is a good idea for long term equity investors.  The core of a small portfolio can start off as simple as one well diversified global ETF with a low expense ratio, like Vanguard Total World Stock ETF (VT).  Typically, as the portfolio grows, the core of the portfolio would include some exposure to the ten asset classes listed above. 

A core ETF portfolio, after tax, should significantly outperform either individual stock picking or a portfolio managed by a financial advisor.  Over the typical investor’s time horizon of 40+ years, the expected return advantage of a core ETF portfolio is staggering.

Investors that enjoy the investment analysis process and are willing to spend the time to analyze and invest in individual stocks or sectors can still do this.  Most investors should set up a core ETF portfolio but can still allocate a percentage of their portfolio to “edge” positions, that offer additional risk and opportunity.

Disclosure: I am/we are long VT, VOO, SCHM, VTWO, IEFA, VWO, GNR.