Investors are seemingly always on a quest for a portfolio they deem to be “well-balanced.” Fortunately for investors seeking balance, exchange-traded funds (ETFs) make that objective significantly easier and, in many cases, less expensive than other instruments.
Many of the best ETFs are inexpensive, highly liquid and span asset classes and regions, helping investors ameliorate the dreaded home country bias. Of course, what makes a well-balanced portfolio for one investor may not be properly balanced to another, but conventional wisdom does dictate that a mix of bonds and equities is a sensible starting point.
From there, more aggressive investors can add in alternative asset classes, including commodities, something many of the best ETFs do in diversified fashion.
In the search for balanced portfolios, here are some of the best ETFs to consider.
JPMorgan BetaBuilders U.S. Equity ETF
You may have recently heard that a pair of ETFs launched with expense ratios of 0%. The JPMorgan BetaBuilders U.S. Equity ETF is not one of those funds, but of the ETFs with fees, the newly minted BBUS is the cheapest, charging a mere 0.02% per year.
While BBUS is new (it debuted in late March), it is one of the best ETFs to act as a core building block for properly balanced portfolios. This fund holds over 620 stocks, providing investors with exposure to over 85% of the U.S. equity market. BBUS has over $30 million in assets under management, which is a decent start, but for investors that like big ETFs, expect BBUS’s stature to soon increase as JPMorgan launches a robo-advisor platform. BBUS will be one of the cornerstones of that offering.
BBUS allocates 21.5% of its weight to technology stocks while the healthcare and financial services sectors combine for 27.3% of the fund’s roster. Investors that embrace this fund should expect long-term returns comparable to those generated by the S&P 500 (.SPX) or Russell 1000 (.RUI) indexes.
iShares Core Total USD Bond Market ETF
As mentioned earlier, a well-diversified portfolio does not begin and end with stocks. It should include fixed-income exposure, too. The iShares Core Total USD Bond Market ETF is one of the best ETFs for novice bond investors or those simply looking for broad-based, cost-efficient exposure to domestic bonds.
The $3.57 billion IUSB, which tracks the Bloomberg Barclays U.S. Universal Index, is one of the best ETFs for bond investors seeking diversity and cost efficiencies. Home to nearly 7,900 bonds, IUSB is also one of the least expensive fixed income funds on the market today. IUSB has a 30-day SEC yield of 2.9%, a 12-month yield of 3% and an effective duration of 5.22 years. Due to heavy exposure to U.S. Treasuries and other government agency debt, credit risk is minimal with this best ETF. Bonds with AAA ratings account for 61.54% of the portfolio.
WisdomTree U.S. Quality Dividend Growth Fund
Sure, there are cheaper dividend funds on the market, but the WisdomTree U.S. Quality Dividend Growth Fund is one of the best ETFs in this category. Dividends, particularly when reinvested, are vital to investors’ long-term outcomes, making DGRW ideal for a broad swath of market participants, be they rookies, sophisticated players or retirement planners.
There are dozens of dividend ETFs for investors to consider, but DGRW’s fundamentally weighted methodology stands out from the pack. A case can even be made that is a dividend ETF Warren Buffett himself would enjoy.
“Return on equity (ROE) is a metric Buffett has written on extensively: it’s a ‘quality’ indicator for stocks, reflecting how much profit a business earns relative to its net equity capital,” according to WisdomTree research.
DGRW’s underlying index emphasizes “both ROE and return on assets (ROA) as part of the selection requirements. Using ROA as a screening criterion penalizes firms using leverage to drive ROE,” notes the issuer.
DGRW also pays a monthly dividend and is worth the cost of admission relative to its peer group.
WisdomTree U.S. SmallCap Dividend Fund
Like its stablemate DGRW, the WisdomTree U.S. SmallCap Dividend Fund is one of the stars in its respective category. This is one of the best ETFs for income-hungry investors as well as those seeking exposure to smaller stocks because DES is historically less volatile than rival non-dividend small-cap funds.
“This portfolio targets dividend payers without incurring too much risk,” said Morningstar in a recent note. “Although the fund doesn’t screen its holdings for profitability or dividend sustainability, a few dividend cuts across its portfolio shouldn’t significantly affect its performance because it is broadly diversified and skews toward larger, more-stable names in the small-value Morningstar Category.”
DES allocates nearly a third of its combined weight to industrial and consumer discretionary stocks while the real estate and financial services sectors combine for 26.3%. Plus, this has long been one of the best ETFs in the small-cap value space.
“From its launch in June 2006 through April 2019, the strategy has topped the small-value category average and the Russell 2000 Value Index (.RUJ) by 1.2 and 1.0 percentage points annually, respectively, with similar risk,” according to Morningstar. “The fund’s favorable stock exposure within the energy and consumer discretionary sectors contributed to most to its outperformance.”
Vanguard Total Corporate Bond ETF
While it is important to remember that bonds are an important part of well-balanced portfolios, investors should also remember that they should be heavily allocated to U.S. government debt. That strategy limits credit opportunities and some of the potential added upside associated with corporate bonds.
Put simply, the Vanguard Total Corporate Bond ETF is one of the best ETFs for investors seeking a massive bench of investment-grade corporate bonds across varying durations and maturities. VTC is classified as an intermediate-term bond fund, but it features exposure to short-, medium- and long-dated corporate debt with almost 6,000 holdings.
VTC accomplishes those objectives in cost-effective fashion by holding Vanguard’s three other corporate bond ETFs, which span the aforementioned maturity categories. Over 87% of VTC’s holdings are rated A or Baa and it has an average duration of 6.9 years.
Vanguard Total International Bond ETF
Keeping with the theme of using cheap bond ETFs to enhance portfolio diversity, there is the Vanguard Total International Bond ETF. BNDX is one of the best ETFs in the fixed income arena this year in terms of both performance and asset-gathering acumen.
BNDX tracks the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index and holds nearly 5,800 bonds with an average duration of 7.8 years. There are other benefits to owning international bonds beyond making a portfolio more diverse.
A fund such as BNDX can help investors access potentially higher yields than are found on domestic government bonds, gain exposure to monetary policies that are not delivered by the Federal Reserve and the potential for higher returns. Over the past three years, BNDX has outperformed the Bloomberg Barclays Aggregate Bond Index by nearly 200 basis points.
iShares Core MSCI EAFE ETF
The iShares Core MSCI EAFE ETF is one of the best ETFs for investors looking to bring cost-effective international equity exposure to their portfolios. IEFA, one of the largest ex-U.S. equity funds in the world, reflects the valuation discounts associated with many ex-U.S. developed markets, including Europe.
“Europe offers attractive asset valuations compared to history, especially in risk assets,” according to BlackRock. “Regional assets have cheapened further compared to a year ago as concerns about growth and politics increased. The exception to this are core government bonds, which we believe to be expensive compared to global peers.”
IEFA’s largest country weight is Japan at 24.75%, but four of its top five geographic weights are European nations, positioning the fund to take advantage of a rebound in stocks across the pond.
“As downward revisions to growth start petering out and incoming activity data begin to show signs of life, European risk assets might get a boost this year as value equities benefit,” according to BlackRock.