A simple 4 ETF portfolio strategy

Here is a simple ETF portfolio using only 4 ETFs offering ultra low fees; they offer strong diversification and flexibility that would suit many retirees, note David Dierking, editor of TheStreet’s Focus on ETFs.

With over 2,000 different ETFs to choose from right now, retirees can position their portfolios almost however they want by targeting or overweighting just about any region, sector, theme or strategy they can imagine. One thing that the ETF industry does perhaps best is the exact opposite of variety: simplicity.

If you want a broadly diversified portfolio that cuts across all major asset classes, ETFs can do it. Best of all, you can have this type of basic wallet for almost no cost. According to ETF Action, there are currently over 70 different ETFs that charge 0.05% or less per year.

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Out of those 70+ ETFs, you want to make sure you’re getting the right diversification. If you just bet on costs and go for the cheapest of this bunch, you’ll be left with just about a bunch of large-cap US funds. It’s not exactly building a well-balanced portfolio.

You could probably cut things down to just two funds if you want to make it as simple as possible, but I think four will do.

Granted, even with a quartet of very diverse funds, you’re still going to find a few small holes and nit-picking, but that’s the beauty of the ETF market. You can always increase your basic positions to orient your portfolio however you choose.

If you were looking to create a simple and diversified portfolio that would suit most retirees, I would consider using the following four ETFs.

Vanguard Total Stock Market ETF (VTI)

This ETF would be your main US equity position. He holds positions in nearly 4,000 different stocks across the large, mid and small cap spectrum.

However, this is a market cap weighted index, so you have strong allocations to all of the big names in mega cap including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGLE). As a result, you have around 89% of the assets that fall into the large cap category.

Large caps have been the best performing group in the US stock market for years, so it would be understandable if you wanted to tilt your portfolio a bit more towards smaller companies. Plus, an 89% large cap allocation isn’t much different than just holding an S&P 500 ETF instead.

If you want to stay with the Vanguard family, the Vanguard Mid-Cap ETF (Fly Vanguard Small Cap ETF (VB) or the Vanguard Russell 2000 ETF (VTWO) would be your best choice.

Vanguard Total International Equity ETF (VXUS)

International stocks haven’t really done much to inspire investor confidence in recent years. Since the start of 2008, an investment in the MSCI EAFE Index or the MSCI Emerging Markets Index would have returned 4% and 1% respectively. At the same time, the S&P 500 posted a return of around 200%. It’s no wonder that so many investors overweight US stocks in their portfolios.

Still, foreign stocks are an important asset class to have in your portfolio. History has shown that American leadership and international leadership in the stock market alternate in cycles of approximately 10 years.

So you could argue that we are due for a turnaround. Of course, with so many countries with so many different risk / reward profiles (economically, politically, etc.), it makes sense to have as much diversification as possible.

What makes VXUS attractive is that 25% of the portfolio is dedicated to emerging markets. It’s a bit more than what can be found in many international equity ETFs, but emerging markets may present the best risk / reward opportunity among the US / developed / emerging market trio.

Instability in China and the significant impacts of the delta variants make emerging markets particularly risky in the short term, but this is still an ideal position in the long term.

You could argue that exposure to emerging markets may be inappropriate for retirees who are likely focused on capital protection at this point in their lives. I think that’s a fair point, although I think emerging markets belong to some extent.

Also keep in mind that this will be part of a portfolio of 4 ETFs, and depending on your personal allocation among the four, emerging markets will be a relatively small piece of the puzzle overall. Even if you devote 20% of your portfolio to international stocks, that would translate into a 5% allocation to emerging markets. Enough to give it a presence, but probably not enough to move the needle significantly.

I will also point out that the Vanguard Total Global Equity ETF (VT) also exists, which is roughly similar to a 60/40 allocation to VTI / VXUS.

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If you are comfortable with a 60/40 US / International mix in the equities portion of your portfolio, I have no problem using it as a replacement for VTI and VXUS. I tend to prefer to use the two ETFs separately, which allows for flexibility in setting my own allocations, but this is a personal choice.

IShares Core ETF Total USD Bond Market (IUSB)

I think many investors would probably default on the IShares US Aggregate Bond ETF (AGG) here, but I prefer IUSB. The reasons are mainly related to the differences in the composition of the portfolio between the two.

AGG tends to favor government and mortgage-backed securities more. This ETF has around 64% of assets dedicated to these two groups combined against 54% for IUSB.

In addition, IUSB holds around 8% of the assets invested in junk bonds, while AGG has no exposure to this group. I think IUSB has a better degree of diversification overall and does a better job of capturing the entire US bond market.

The only thing missing from both ETFs is exposure to international bonds (the main eligibility criteria for IUSB are bonds denominated in US dollars, so although there is modest exposure to non-US issuers, there is there is a lack of pure international investment).

There is also the Vanguard Total Global Bond ETF (BNDW) optional. It has a 50/50 split between US and international bonds, but like AGG it has almost no exposure to junk bonds.

If you want your bond allowance to include both junk bonds and international exposure, you will likely need to go for two ETFs instead of one. The Vanguard International Total Bond ETF (BNDX) might work with IUSB, but it invests strictly in quality bonds, so a match with AGG would still omit junk bonds.

It gets a little trickier, but IUSB remains my only fixed income ETF of choice.


Most types of portfolio advisers would suggest a 5-10% allocation to real estate and I would tend to agree. The VTI and VXUS each only have around 3% allocation to real estate, so the current portfolio as built is just not going to reduce it. That’s why I would add SCHH here to bring the REIT’s overall allocation back into this range.

The Vanguard Real Estate ETF (VNQ) owns about half of the assets in the real estate ETF space, but I prefer SCHH because it is the cheapest ETF in this group (by a single basis point, but still) and it has a strong degree of diversification and quality. It focuses on some of the biggest and most financially sound REITs available and adds both mortgage and hybrid REITs to improve the mix.

How to build a portfolio allocation

Here’s the tricky part – how to allocate to each of these four ETFs to find the right mix.

This will mainly depend on personal preferences and circumstances. The “rule of 100” used to guide how retirees should allocate their portfolios. This principle said that you should subtract your age from 100 and that is how much you should invest in stocks. For example, a 70-year-old should have 30% of his portfolio in stocks under this rule.

This type of change has become the “rule of 120” over the past ten or two years, with people citing longer lifespan as the reason. Let’s separate the difference and create the “Rule of 110” rule. In this example, let’s use an overall equity / bond allocation of 40/60 keeping in mind that you can increase or decrease it if you wish.

We have already talked about a 5-10% allocation to real estate as a guideline. Let’s go to the high end with 10% since retirees are probably going to want to focus on higher current income. A higher allocation to REITs allows this.

This would leave the 60% fixed income allocation to IUSB and the remaining 30% to be split between VTI and VXUS. Most people tend to favor US stocks in their portfolios, but it’s important to keep at least some international stocks. Let’s put 20% in VTI and 10% in VXUS.


For retirees looking for the simplest and cheapest portfolio to suit their golden years, this 4 ETF portfolio I have featured here could certainly do the trick. Its weighted expense ratio of around 0.07% ensures that almost all of your money stays in your pockets.

Allocations within this group should be fluid and should depend on your risk tolerance and personal goals. Risk enthusiasts are likely to have little qualms about going well above the 40% equity target I mentioned, while others might go all-in on bonds.

I encourage you to consider what is most comfortable for you and meets your individual goals before proceeding. And if you prefer to orient your portfolio towards a specific asset, sector, or theme, feel free to consider adding one or two other low-cost ETFs to top it all off.

The only downside to this, of course, in today’s market environment is performance. Or its absence. If you are looking to live solely on the income of the portfolio, the current return of around 2% on that portfolio is unlikely to reduce it.

The temptation might be to step further off the risk spectrum by looking at junk bonds, mortgage REITs, MLPs, or other high yield asset classes. I urge investors to exercise extreme caution before venturing heavily into these types of assets, which will put you at significant downside risk should conditions turn south.

Look no further than the returns of these groups during the COVID bear market to see what can happen. It may be wiser to consider withdrawing some of the balance from your portfolio to increase what you can receive in dividends instead of increasing the risk.

If you’re looking for a good, basic portfolio to build on for retirement, I think these 4 ETFs along with some of the alternatives mentioned will help most retirees achieve their goals.

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Don F. Davis

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