These ETFs Will Fix Your Portfolio

Chances are, your finances need a tuneup.

Reviewed by: Dave Nadig
Edited by: Dave Nadig

Chances are, your finances need a tuneup.

Every time we get insights into how actual investors are allocating their money, it’s somewhat depressing.

Just a few weeks ago, we had the shocking news that fully 60 percent of retirement accounts were allocated to either 100 percent cash, or 100 percent equity—both positions are evidence that people simply do not pay much attention to their financial future.

Financial advisors are definitely one path to fixing the problem, and with everyone and their brother launching a robo-advisor platform, I can imagine a future where the “default” investment is no longer cash, but a well-diversified portfolio of middling risk with a 0.25 percent fee bolted on.

Or, if you read today’s headlines, perhaps investors will end up in a “pay what you want” advisor service.

But until we get to that future, most investors will sit down sometime around the end of the year and take a quick glance at their portfolio, make a few switches and then forget about it for a while. I covered a few tax moves you can use in that process last week. This week, here are a few specific ETFs I’m guessing most portfolios would benefit from because of their costs and exposures, the two things investors can control.

Vanguard Total Stock Market (VTI | A-100)

Many investors think of their allocation to U.S. equities as a single, simple thing: They buy the S&P 500. If they’re smart, they at least buy that exposure in a super-tax-efficient and inexpensive vehicle like the iShares S&P 500 ETF (IVV | A-98), which charges 7 basis points, tracks like a freight train, trades $1 billion a day at penny spreads and rarely if ever makes any capital gains distributions.

But the S&P 500 is just a tiny slice of the U.S. markets. It will miss any small-cap rally. And it will be fully subject to the whims of the raft of other investors who monolithically focus on 500 committee-selected large- and midcap U.S. stocks.

If you’re only going to own one equity ETF, consider VTI instead. It’s cheaper (at 5 basis points) and tracks even better than you might think (in most one-year holding periods, it will be just a basis point or two off of the index, making it practically free) and trades like apples at a cider festival. More importantly, it owns 3,600 stocks, reaching all the way down into micro caps.

More exposure, better exposure, cheaper. What’s not to love?


iShares Core MSCI Total International Stock (IXUS | A-99)

Maybe you’re smarter than the average investor, and you recognized some time ago you needed a little international diversification in your equities. There are certainly lots of mutual funds to choose from out there, but good luck trying to find one that provides clean exposure.

The enormous Dodge and Cox International Fund, for example, claims to fill the bill, and $64 billion in assets believes their benchmark outperformance to their chosen developed-markets MSCI EAFE index. Too bad the fund’s largest holdings include U.S. companies like Hewlett-Packard, and that it’s actually a quarter emerging markets.

Consider, perhaps, knowing what you’re actually owning, with a fund like IXUS.

IXUS has predictable coverage of 99 percent of the world’s non-U.S. market cap, including a steady 14 percentage exposure to emerging markets and non-U.S. market overlap. It charges 16 basis points, but you won’t likely ever end up paying that—the fund regularly earns back far more than its expense ratio through smart securities lending, so on average, you’ll get paid 7 basis points to own the fund.

Vanguard Total International Bond (BNDX | B-57)

While it’s a bit hard to love the bond market, with the risk of rising interest rates in front of you, most investors look to the bond market for income and a little diversification.

Whether you’re a fan of PIMCO’s active management or a die-hard indexer, chances are your bond exposure benchmarks pretty closely to the Barclays Aggregate Bond Index.

All well and good, but that’s almost as bad as being locked in to the S&P 500. There’s a whole wide world of bonds out there that offer lower correlations and potentially higher yields.

Until last year, this space was incredibly difficult to access efficiently, until Vanguard launched BNDX. For just 20 basis points, the fund offers a broad range of investment-grade sovereign debt, corporate bonds and supranationals from countries around the world.

Importantly, the fund hedges out its currency risk, so your exposure is just to the local debt markets in each country. The fund has a duration of about seven years, and holds debt with an average coupon around 3 percent.

Take Charge

The most important part of any investing process is control. ETFs help you know what you own, minimize costs, manage your taxes and fine-tune your exposure. These three ETFs can help you do all three, and they’re just the tip of the iceberg. If you’re looking further afield, you can search and sort through all 1,700-odd ETFs in our ETF finder.

At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.


Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.