Radical Guide to Investing: The Low-Maintenance ETF Portfolio
For many people, the idea of reducing their portfolio to only 10 ETFs is a dream: no more individual stocks to keep an eye on, no more mutual fund ratings to track. But for others, even 10 ETFs may seem like too much work. So here's a portfolio that consists of only 5 ETFs:
|ETF Ticker||Fund Name||Fund Description||Expense Ratio|
|IYY||iShares Dow Jones U.S. Total Market Index Fund||All US stocks||0.20%|
|EFA||iShares MSCI EAFE Index Fund||Large cap foreign developed market stocks||0.35%|
|EEM||iShares MSCI Emerging Markets Index Fund||Large cap emerging market stocks||0.75%|
|RWR||streetTRACKS Wilshire REIT Index Fund||Real estate investment trust index fund||0.25%|
|AGG||iShares Lehman Aggregate Bond Fund||U.S Treasury and Corporate Bonds||0.20%|
What do you give up in return for the convenience of handling fewer ETFs and the reduced trading cost of having to purchase fewer ETFs?
First, let me state what you don't give up. You don't give up diversification. Like the 10 ETF portfolio in the previous chapter, this portfolio covers the entire U.S. stock, bond and REIT (real estate investment trust) markets, and developed and developing foreign stock markets.
Here's what you do give up:
1 The US stock market is dominated by large cap stocks, and that's reflected in the total market ETF included in the Low-Maintenance Portfolio. Historically, small cap stocks have outperformed large cap stocks, and you might think this will continue to be the case. If so, you'll be frustrated that this portfolio of ETFs doesn't allow you the flexibility to increase your asset allocation to small caps relative to large caps.
2 This portfolio is more expensive than the Core ETF Portfolio presented in the last chapter. Chances are you'll allocate a fairly large proportion of your holdings to large cap US stocks, whether you do it directly though a large cap index fund in the Core ETF Portfolio or through a total market index fund in the Low-Maintenance ETF Portfolio. In the Core ETF Portfolio, the iShare S&P 500 ETF had an expense ratio of only 0.09%, versus the Total Market ETF's expense ratio of 0.20% in this portfolio. And the bond funds in the Core ETF Portfolio had expense ratios of 0.15%, versus the bond fund's expense ratio of 0.20% in this portfolio.
3 Having fewer ETFs in your portfolio reduces the rebalancing opportunities, and that may reduce the portfolio's long-run performance. (More on rebalancing in the section on How to Manage Your Portfolio to Reduce Risk and Raise Returns.
4 It may be harder to calculate the tax status of interest paid into your account from the bond fund in this portfolio. Treasury bond interest is not taxed by States and localities, whereas Corporate bond interest is. The Lehman Aggregate Bond Fund in this portfolio bundles Treasury and Corporate bonds together, whereas the bond ETFs in the Core Portfolio break them out separately.
At the end of the day, you just have to decide whether the lower effort and simplicity of the Low Maintenance Portfolio is worth the added cost to you.
When I first wrote A Better Way to Invest, I believed that investors who read the book would no longer seek advice, and would find the assembly and management of a portfolio of 10 or 11 ETFs easy. But experience has proved otherwise. Many investors, it seems, will gladly trade the slightly higher cost and lower flexibility of the Low Maintenance Portfolio for its simplicity. And that's fine: with the Low Maintenance Portfolio, you can still capture all the reduced-risk, reduced-fees and reduced-tax benefits of running your own ETF portfolio.
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June 1, 2005 | Permalink
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