3 Simple All-ETF “Core” Portfolios

by on November 1, 2012 | ETFs Mentioned:

The proliferation of exchange-traded funds over the past few years has opened up the doors to previously difficult-to-reach corners of the global market, making it easy and cost-effective for mainstream investors to tap into virtually any asset class. While the current lineup of nearly 1,500 ETFs is likely intimidating at first glance, it’s important to remember that these financial instruments were created with simplicity in mind. ETFs were originally designed for buy-and-hold investors; as such, these vehicles are meant to simplify the investing process by offering access to diversified baskets of securities through a single ticker [see also Free 7 Simple & Cheap ETF Model Portfolios].

The largest issuer by total assets, iShares, has taken the themes of simplicity and cost-efficiency to a new level with its recent launch of the “Core Series” of ETFs. This initiative includes the launch of several new funds along with tweaks to the names and prices of some popular existing iShares ETFs, ultimately offering a greater variety of “core” building block ETFs suited for long-term, buy-and-hold investors [see How To Pick The Right ETF Every Time].

As such, below we outline three simple (and inexpensive) ETF model portfolios built around the iShares “core” lineup of funds:

Total Market Simplicity

Ticker ETF Weight Expense Ratio Commission Free
ITOT Core S&P Total U.S. Stock Market ETF 35% 0.07% Not Available
IXUS Core MSCI Total International Stock ETF 35% 0.16% Not Available
AGG Core Total U.S. Bond Market ETF 30% 0.08%  Fidelity, TD Ameritrade
Total   100% 0.10%  

This portfolio covers every major asset class, and it does so with only three tickers. ITOT covers almost the entire U.S. equity market as it is comprised of the S&P 500, MidCap 400 and SmallCap 600 Indexes. IXUS covers foreign stocks outside of the United States, and its portfolio spans across both developed and emerging markets. The final component, AGG, is the core bond holding, which can serve to tame overall volatility as it focuses on U.S. investment grade debt notes from the government as well as corporations.

Ex-U.S. Portfolio

Ticker ETF Weight Expense Ratio Commission Free
IEFA Core MSCI EAFE ETF 60% 0.14% Not Available
IEMG Core MSCI Emerging Markets ETF 40% 0.18% Not Available
Total   100% 0.15%  

Investors looking to steer clear of domestic securities given the frustratingly slow recovery at home may wish to undertake the ex-U.S. approach this portfolio offers. IEFA fills the need for developed market exposure as it tracks the popular MSCI EAFE Investable Market Index; this benchmark is comprised primarily of large cap securities from the United Kingdom and Japan. IEMG on the other hand fills the need for “high-growth” opportunities, tapping into emerging markets like China, South Korea, Taiwan, Brazil and South Africa [see also Euro Free Europe ETFdb Portfolio].

International Bull Porfolio

Ticker ETF Weight Expense Ratio Commission Free
IJR Core S&P Small-Cap ETF 40% 0.16% Fidelity, TD Ameritrade
IEMG Core MSCI Emerging Markets ETF 40% 0.18% Not Available
ILTB Core Long-Term U.S. Bond ETF 20% 0.12% Not Available
Total   100% 0.16%  

This portfolio is designed for long-term investors who are willing to take on more risk in exchange for attractive upside potential. IJR rounds out exposure to the U.S. small cap market, an asset class that has demonstrated the potential to deliver better risk-adjusted returns than large cap counterparts during certain environments. IEMG taps into emerging markets, another asset class that features a lucrative risk/return profile for those with a stomach for volatility. ILTB rounds out the fixed income component, and its focus on longer-term U.S. bonds offers an attractive source of current income. However, this ETF does bear greater interest rate risk than its shorter-term counterpart ISTB [see also Greedy When Others Are Fearful ETFdb Portfolio].

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Disclosure: No positions at time of writing.