ETF-Only Portfolios

1/18/2016


We're committed to recommending only our very favorite funds. Our top 20 picks, including 19 traditional open-end mutual funds, can be found below. Our recommended portfolios have delivered solid returns over the years.

Through December, investors who bought our Growth Portfolio and followed our changes over the last 10 years would have earned an annualized return of 6.4%, slightly above the 6.3% for its benchmark. The Conservative Portfolio had an annualized gain of 6.5%, versus 6.0% for its benchmark.

Still, we accept that investors have embraced exchange-traded funds (ETFs) because of their low cost and trading flexibility. That's why we built two all-ETF portfolios that mimic our Growth and Conservative portfolios. The portfolios aren't a perfect match, as ETFs and open-end funds rarely share identical strategies. There are also far fewer ETFs to choose from — our rating system scores 4,611 open-end funds but only 925 ETFs.

The all-ETF portfolios listed below hold 12 high-potential funds and won't cost much to purchase. The growth portfolio has an expense ratio of 0.19%, while the conservative portfolio charges only 0.18%. Assuming a commission of $8 per trade, the total cost to purchase either portfolio is $96. Totaling annual expenses and trading fees (including a one-time rebalancing), the 12-month cost of owning either portfolio would be less than $300, or 0.60% of a $50,000 account.

ALL-ETF PORTFOLIOS
Our all-ETF portfolios, which approximate the attributes of our recommended Growth and Conservative fund portfolios, are a solid choice for frugal investors.
---- Target Weight ----
Expense
Ratio
(%0
12-Month
Total
Return
(%)
Fund (Price; Ticker)
Conservative
(%)
Growth
(%)
Fund
Rating
iShares Core S&P Small-Cap
($100; IJR)
5
6
0.12
(9.5)
100
iShares MSCI EAFE Growth
($63; EFG)
9
9
0.40
(2.3)
93
iShares MSCI EAFE Small-Cap
($47; SCZ)
4
6
0.40
2.9
89
iShares Russell 2000 Growth
($123; IWO)
7
7
0.25
(11.9)
89
PowerShares Fund. High Yld.
($17; PHB)
5
6
0.50
(5.0)
77
PowerShares S&P 500 High Qlty.
($22; SPHQ)
10
10
0.29
(2.9)
98
Vanguard 500 ($173; VOO)
7
8
0.05
(4.6)
99
Vanguard Growth ($98; VUG)
10
11
0.09
(3.5)
75
Vanguard Interm.-Term ($84; BIV)
13
8
0.10
0.7
81
Vanguard Mid-Cap Value ($78; VOE)
5
8
0.09
(8.8)
99
Vanguard Short-Term Corp.
($79; VCSH)
9
4
0.10
1.0
100
Vanguard Value ($76; VTV)
16
17
0.09
(6.4)
100

Long-term investors who can tolerate higher risk should consider the all-ETF growth portfolio, which is about 66% U.S. stocks, 15% foreign stocks, and 18% bonds. As presently constructed, the portfolio would have had an annualized return of 9.8% and standard deviation (a gauge of monthly volatility) of 10.3% for the five years ended December.

The all-ETF conservative portfolio — roughly 59% U.S. stocks, 13% foreign stocks, and 27% bonds — makes sense for more cautious investors with shorter time horizons. Over the last five years, the portfolio would have had an annualized return of 9.2% and standard deviation of 9.2%.

Both portfolios hold about 1% in cash. Large-caps represent about 57% of the stock portion of the all-ETF growth portfolio and 60% of the conservative. The portfolios have a slight bias toward growth stocks. The growth portfolio yields roughly 2.1% and the conservative 2.2%.

OUR RECOMMENDED MUTUAL FUNDS
Investors wishing to mimic our recommended Growth and Conservative portfolios should purchase the funds listed below in the proportion suggested by the target weights.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($27; ARTIX)
(5.8)
B
9
9
66
Baird Core Plus Bond ($11; BCOSX)
0.8
A
9
4
67
Dreyfus Midcap Index ($30; PESPX)
(6.3)
C
0
0
54
Dreyfus Small Cap Stock Index
($24; DISSX)
(7.0)
B
0
0
95
Homestead Small Company
($33; HSCSX)
(6.7)
B
5
6
60
iShares MSCI EAFE Small-Cap ETF
($47; SCZ)
(5.5)
B
4
6
89
PRIMECAP Odyssey Stock ($22; POSKX)
(5.4)
D
10
10
97
T. Rowe Price Divers. Small-Cap Growth
($24; PRDSX)
(7.1)
B
7
7
99
T. Rowe Price Value
($29; TRVLX)
(5.7)
C
10
11
95
Thompson Bond ($11; THOPX)
(0.7)
E
9
4
21
Vanguard 500 Index ($179; VFINX)
(5.1)
B
7
8
85
Vanguard GNMA ($11; VFIIX)
0.6
C
0
0
98
Vanguard Growth Index
($52; VIGRX)
(5.2)
B
10
11
74
Vanguard High-Yield Corp. ($6; VWEHX)
(0.6)
B
5
6
98
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
0.8
B
0
0
92
Vanguard Selected Value
($24; VASVX)
(6.4)
C
5
8
88
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.3
A
0
0
95
Vanguard Total Bond Mkt. Index
($11; VBMFX)
0.8
A
0
0
65
Vanguard Wellesley Income
($24; VWINX)
(1.1)
A
0
0
99
Vanguard Wellington ($36; VWELX)
(3.2)
B
10
10
96

* Year-to-date ranks through Jan. 12 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%. † Fund ratings are percentile ranks based on our fund-rating system.


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