Disclaimer: I am not a professional investment manager or financial advisor. The content of this post is not intended to be financial advice. It should not be taken as financial advice. You should seek personal and professional financial advice before making any investment decision.
The search for the ultimate ETF investment portfolio is often come across amongst the FIRE community – and with good reason. Portfolios that are well diversified, inexpensive and likely to offer good returns are somewhat of an investors holy grail. A number of offerings have been suggested based on various baskets of ETF’s, including the Bogleheads three-fund portfolio. Understandably popular with American investors, the Bogleheads method is attractive for those wanting a simple portfolio with an allocation to stocks and bonds.
For Australian investors, things need to be a little different. We probably desire to take greater advantage of franking credits and have a lower exposure to the US market than an American investor.
Below are three simple ETF portfolio’s I’ve been considering for my own long term investments. I’ve only thought about my situation when selecting these ETF’s and you should do your own research before making an investment decision.
Vanguard High Growth ETF – VDHG
Recently, Vanguard Australia released their High Growth ETF, VDHG. It provides excellent diversification and access to several wholesale funds in one simple ETF. VDHG has a management fee of 0.27% p.a. and a 90% allocation to stocks, 10% to bonds.
This is a pretty decent option for the long term Australian investor – with a horizon of 20 years plus. It has good exposure to local (35%) and international markets (54%). There is modest allocation to bonds and fixed interest (9.9%). But yes, you read that right. Short of investing into a straight equities ETF, this is the most aggressive all in one Vanguard ETFs there is.
Can we do better? And if we could, what would that look like?
Many of us are 20+ years away from FIRE or traditional retirement. That means we may desire – and could possibly afford – to be more aggressive with long term investments than the typical high growth fund. If we were to create an improved collection of ETF’s than VDHG – what would that look like?
My criteria for better include the following.
- Full 100% equities exposure, no fixed interest or bond component
- Lower overall management fee
- Greater tilt toward aspects of the market likely to outperform (i.e. emerging markets and small caps)
- No more than 5 underlying ETFs – the number of equities ETFs in the VDHG fund
With these four guiding principles in mind, I’ve come up with two alternative yet simple ETF portfolios. The first mimics VDHG but reduces the home-bias by a third in favour of emerging and international markets. It also tilts the US components of the portfolio toward small caps – which have historically out-perform the broader market. Around 7% of VDHG is invested in small caps.
The second removes home-bias altogether in favour of the US, Europe, Asia and emerging markets. Like the first portfolio, the second tilts toward smaller cap companies.
Portfolio One. 25% AUS – 30% US – 45% WORLD
I designed this ETF portfolio for my Superannuation account. It deliberately neglects real-estate because I’m highly likely to buy a commercial property for work with a portion of my Super. It otherwise serves as simple high growth option for the remainder of my retirement fund. I might add a global REIT down the track – for now the 100% equity allocation is appealing.
The table above shows the top 20 holdings in comparison to VDHG. We can see this portfolio is a third underweight domestic Aussie shares and sightly overweight international shares, especially those in emerging markets which hold around 1.5-2x more weight than in VDHG. The combined management fee is 0.17% p.a. and the weighted dividend yield is 2.55% without factoring in franking credits.
All holdings can be seen in the pie-chart above. Gotta love those colours!
Portfolio Two. 3% AUS – 30% US – 67% WORLD
I designed this second portfolio to sit alongside my direct share investments, in the WF30 portfolio or in my Super fund if I decide to invest directly in Australian shares there as well. I still don’t know if I’ll beat the market over the long term but have thought about investing around a third to half of the WF30 portfolio in a basket of ETFs.
Given that the majority of my direct investments are Australian stocks, this ETF portfolio focuses far more on international markets. In reality, the overall portfolio would still remain heavily invested in Australian stocks.
The table above shows the top 20 holdings in comparison to VDHG. This portfolio has just 3% Aussie shares. As a result, it’s overweight international shares, especially those in emerging markets, Europe and Asia. The management fee is 0.15% p.a. and the weighted dividend yield is 2.37%.
All holdings can be seen in the pie-chart above. Hooray for another rainbow! 🙂
Let’s take a quick look at the underlying ETFs.
Betashares ASX200 – A200 –
Recently launched, A200 provides exposure to the largest 200 companies on the ASX by Market Cap. It has a very low management fee for an Australian ETF. An alternative would be VAS, which invests in the ASX300.
iShares S&P Small Caps – IJR –
IJR provides exposure to US small-caps and aims to replicate performance of the S&P Small-Cap 600. It has an attractively low management fee.
Vanguard US Total Market – VTS –
VTS adds broad exposure to the US stock market. VTS invests in 3650 companies, including small caps. There is no currency hedging on VTS.
Vanguard All World Ex US – VEU –
VEU provides exposure to the worlds largest listed companies in developing and emerging countries outside the USA. It has over 2500 holdings and operates without a currency hedge.
There is a little bit of back and forth debate online about the merits of VEU+VTS vs. a direct investment into Vanguards MSCI International Shares ETF, VGS. It seems to me there is only a very small difference over the long run, but it typically favours VEU+VTS for holding periods of 7+ years. Some firmly disagree though. I prefer the VEU+VTS+IJR option as it allows greater control over US allocation than a straight VGS investment.
iShares Emerging Markets – IEM –
Emerging markets are inherently viewed as higher risk than developed markets, but historically provided good returns. IEM adds further concentration to emerging markets than VEU by investing directly in over 800 emerging market stocks. It primarily invests in mid to large caps stocks with a high allocation to China, Korea, Taiwan, India, Brazil, South Africa and Russia.
It’s difficult to tell what the yield on VDHG will be, but I suspect it will be in the region of 3% p.a. The alternative portfolios have a current weighted yield of 2.58% and 2.37% p.a. respectively. This should be quite competitive with VDHG when factoring in the greater probability of capital growth.
In both tables above, the dividend yield on Betashares recently launched A200 ETF I’ve estimated from Vanguards equivalent ASX200 ETF.
The weighted management fee is a low 0.17% p.a. and 0.15% p.a. for each of these portfolios respectively.
Keeping brokerage low
The management fees exclude brokerage costs, but for the long term investor these can be kept low. Re-balancing could take place once a year which with a discount broker should cost less than $100 p.a. Another way to keep re-balancing costs low is to direct new investments only to underweight portions of the portfolio, thus delaying capital gains and sell-side transaction costs.
As it stands, these are my two preferred ETF baskets for my personal investments. I’m probably 12-months away from implementing something like these in my Super or personal portfolios, but they serve as a decent starting point for further decision making.
I’m curious if any of you have a similar set up or if you can see a better way to approach the above.
If you developed your own custom ETF portfolio or have suggested modifications, it would be great if you added your thoughts to the discussion below!