ETFs Made Easy: 2 Simple Portfolios

February 12, 2015

Question 2: How Many ETFs?

This is where it gets tricky, and ultimately, the answer is going to come down to how lazy you are. If you’re really, truly lazy, you can implement your 60/40 portfolio with just two funds. By limiting yourself to two funds, you minimize complexity, but you put a higher emphasis on getting the “right” two funds.

For your equity fund, you’ll likely want a fund that has stocks from all over the world, and from up and down the capitalization spectrum. There’s a whole segment of 10 funds competing for those dollars called “Global Total Market Equity.”

Our analyst pick in that segment, the Vanguard Total World Stock ETF (VT | A-100), gets you 6,775 stocks covering 98 percent of the world’s markets. While it has 1.67 percent of its money in Apple, it also has a 2.5 percent allocation to Australian stocks, and even includes a 1 percent allocation to micro-cap stocks, all for just 0.18 percent a year.

On the bond side of the portfolio, things are less obvious. There’s no equivalent to VT for bonds, so if you’re limiting yourself to a single fund, you’re likely going to be stuck with U.S. bonds.

The traditional choice here is an ETF tracking the Barclays Aggregate index, which covers nearly 9,000 bonds from governments, companies and agencies. It includes mortgage-backed securities, and bonds rated down to about BBB, or the bottom of the investment grade scale.

There are three ETFs tracking that index, all good, but our analyst pick there is the iShares Core U.S. Aggregate Bond ETF (AGG | A-98), at a skinny 0.08 percent a year.

Simplest 2-Fund Portfolio

Fund Ticker Allocation Expense Ratio
Vanguard Total Market VT 60% 0.18%
iShares Core U.S. Aggregate Bond AGG 40% 0.08%
    Blended ER 0.14%

A few notes about this approach. In any given year, one of these two funds is going to do better than the other. Over the last year, VT was up 7.7 percent and AGG was up 5.47 percent, meaning that right now, you’d be 60.5 percent in equities.

That’s not much of a drift, but a key part of any portfolio strategy is monitoring this allocation and rebalancing, generally when the portfolio crosses a threshold. A 5-10 percent tolerance is very common. With a 10 percent threshold, you’d wait until your VT position was 70 percent of your holdings, and then sell a bunch (buying AGG with the proceeds).

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