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The idea of a well-balanced or perfect portfolio can seem daunting for many investors, especially those who are learning how to invest for the first time. Even professionals struggle to reach “perfect” asset allocations and, let’s be honest, many people have different ideas about what constitutes “good” returns, so aiming for perfection can be akin to aiming at a moving target.
The famed modern portfolio theory (MPT) examines how risk-averse investors can optimize returns, but given that investors have varying degrees of risk tolerance, what is a well-balanced portfolio for one, may not be for another investor.
Some tried and true versions of well-balanced portfolios are likely to include a mix of bonds and stocks with exposure to the former rising as the investor ages.
“Each investor profile has an associated asset allocation—the percentage of investments including stocks, bonds and cash that a portfolio holds. Asset allocation is a strategy that can help you balance portfolio risks and rewards,” according to Bank of America Merrill Lynch.
Exchange-traded funds (ETFs) make for ideal tools in building well-balanced portfolios. Many of the best ETFs feature large rosters of holdings, low costs and are suitable for use by novice and sophisticated investors. Here are some of the best ETFs for building a well-balanced portfolio.
iShares Core MSCI Total International Stock ETF (IXUS)
Expense Ratio: 0.10%, or $10 annually per $10,000 invested
Investors in every country have a bias toward their own country’s stocks. That also means a lot of investors are missing out on some of the best ETFs while limiting their portfolio’s diversification. Total market funds, such as the iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) are among the best ETFs for U.S. investors looking to add international exposure to their portfolios.
IXUS is a broad, cost-efficient fund that features exposure to developed and emerging markets. The fund holds over 3,400 and tilts heavily toward developed markets. While international equity funds are usually more volatile than U.S. equivalents, IXUS’s three-year standard deviation of 11.66% should be palatable even for risk-averse investors.
IXUS allocates about 29% of its combined geographic exposure to Japan and the U.K. China is the fund’s largest emerging market weight at just over 7%.
iShares Core Conservative Allocation ETF (AOK)
Expense Ratio: 0.25%
If asset allocation is not your thing, some ETFs can help ease that burden. The iShares Core Conservative Allocation ETF (NYSEARCA:AOK) is one of the best ETFs for investors seeking a conservative mix of bonds and equities. Best of all, this does the asset allocation for the investor.
AOK’s seven holdings are other iShares, five of which are equity funds. However, the fund lives up to its conservative billing as over 70% of its weight is dedicated to two bond funds. That gives AOK a significant dividend yield and a significantly lower standard deviation than a broad market index such as the S&P 500.
Due to its heavy fixed income tilt, AOK is one of the best ETFs for investors looking for a traditional approach to lowering portfolios’ correlation to major equity benchmarks like the S&P 500.
WisdomTree U.S. MidCap Dividend Fund (DON)
Expense Ratio: 0.38%
It is often said the mid caps are the overlooked segment of the equity market. It is also frequently noted that mid-cap stocks historically outperform their large-cap rivals, while offering less volatility than small-cap stocks. Knowing these factors, it is safe to say well-balanced portfolios should include more than just large-cap equities.
The WisdomTree U.S. MidCap Dividend Fund (NYSEARCA:DON) is one of the best ETFs in the mid-cap space and not just because it comes with a dividend buffer, though that helps. DON’s trailing 12-month dividend yield of 2.59% is nearly 120 basis points above the yield on the S&P MidCap 400 Index. Over long holding periods, DON has a track record of outperforming the S&P MicCap 400 as well as actively managed mid-cap funds.
The fund’s long-term performance and status as one of the best ETFs for mid caps justify a fee that is above those found on more basic mid-cap strategies. DON, which also holds about 400 stocks, allocates 34.70% of its weight to the consumer discretionary and real estate sectors.
Vanguard Total Bond Market ETF (BND)
Expense Ratio: 0.05%
As was noted earlier, well-balanced portfolios should not be overly allocated to a single asset class. For investors that are new to fixed income funds, total market exposure makes a lot of sense, particularly when it comes with a low fee and lots of liquidity.
Enter the Vanguard Total Bond Market ETF (NYSEARCA:BND), one of the best ETFs for diversified bond exposure.
BND “actually makes this a pretty good complement to stocks because those more highly rated conservative bonds tend to provide good downside protection. So in periods when the stock market is selling off this can provide a nice counterbalance to stocks and serve as the defense within your portfolio,” according to Morningstar.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Expense Ratio: 0.35%
Building a well-balanced portfolio can mean investing for the long term and dividends definitely deserve a place at the long-term investing table. Moreover, safe, steadily rising dividends are vital to investors’ long-term total returns.
The ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) is one of the best ETFs for investors looking for broad exposure to stocks with a long histories of consistently boosting payouts. NOBL targets the S&P 500 Dividend Aristocrats Index, which only includes companies that have increased dividends for 25 consecutive years. There are other reasons why NOBL is one of the best ETFs for truly balanced portfolios.
“Since year-end 1989, there have been six calendar years of negative performance for the S&P 500—and in all six years, the S&P 500 Dividend Aristocrats outperformed the equity benchmark by an average of 13.28%. In fact, the S&P 500 Dividend Aristocrats produced a positive total return in three of those years,” according to S&P Dow Jones.
Invesco S&P 500 Low Volatility ETF (SPLV)
Expense Ratio: 0.25%
Some implementation of factor-based strategies can be useful in well-balanced portfolios and given the long-term nature of such portfolios, the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) is one of the best ETFs to consider. SPLV follows the S&P 500 Low Volatility Index, a collection of the 100 S&P 500 members with the lowest trailing 12-month volatility.
Low volatility funds usually do not capture all of the upside during strong bull markets. Rather, products like SPLV are designed to limit downside when stocks slide. If they do what they are supposed to do, funds like SPLV can be some of the best ETFs in rough market environments as was the case late last year.
“The fourth quarter of 2018 was exceedingly tough for US equities, with no gains to be found in any of the indexes tracked by our quarterly factor scorecard. And yet, certain factors — namely Low Volatility and Dividend Yield — were able to significantly cushion the blow suffered by the broad market. While the S&P 500 Index lost 13.52% in the quarter, the S&P 500 Low Volatility Index fell just 5.22%,” according to Invesco.
Vanguard Total Corporate Bond ETF (VTC)
Expense Ratio: 0.07%
When building what they think are adequately diversified portfolios, many investors allocate to just one bond fund or one corner of the bond market. Opting for a diversified bond fund can leave fixed income investors short on yield. The Vanguard Total Corporate Bond ETF (NASDAQ:VTC) is one of the best ETFs for boosting your portfolio’s yield without moving to junk bonds.
As an ETF of ETFs, VTC holds three other corporate bond ETFs by Vangaurd, which helps diversify duration risk while enhancing the fund’s yield profile. The average duration of VTC’s 3,837 holdings (one of the largest rosters in the corporate bond space) is seven years.
Almost half of VTC’s holdings carry BBB ratings. VTC is also one of the best ETFs for cost-conscious investors, as only eight corporate bond ETFs have lower expense ratios than this Vanguard fund.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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