Vanguard ETFs are some of the cheapest exchange-traded funds on the market. With a wide variety of funds to choose from, an investor can build a complete portfolio entirely from Vanguard's lineup of ETFs. In this article, we'll show you how to put together the best combination of funds to stay diversified.
Many investors are familiar with Vanguard's mutual funds, most of which are passively managed index funds with extremely low expense ratios. In 1976, Vanguard also introduced the first index fund, Vanguard 500 Index (VFINX). (That fund is now available only as Admiral Shares.) Since that 1976 fund introduction, Vanguard's been known as the home of low-cost, no-load mutual funds. In recent years, it has built an impressive selection of ETFs, making Vanguard the second-largest provider of ETFs.
- Building a portfolio of Vanguard exchange-traded funds is an easy way to diversify your portfolio with just a few holdings.
- Beginning with an S&P 500 index fund, supplemented by a bond fund and sector-specific funds, will give you good exposure to a variety of asset categories.
- Most investors can build a diversified portfolio with as few as two or three ETFs.
How to Build a Portfolio of ETFs
When building a portfolio, the general strategy that is appropriate for most investors is to buy multiple investments from different asset classes and categories. For example, an investor may want to include a combination of assets, such as stocks and bonds, in the portfolio. Within each asset class, there are different categories, such as large- and small-cap stocks or long- and short-term bonds. That is the foundation of diversification.
The best portfolio for each investor will differ based upon the individual's risk tolerance and time horizon. For example, an investor with a high tolerance for risk may allocate a higher percentage of their portfolio to stocks, whereas an investor with a lower tolerance for risk may choose to allocate more to bonds. In either case, investors with longer time horizons, especially for 10 years or more, can generally allocate more to stocks than bonds.
When building a portfolio of ETFs, an investor can easily allocate their investment assets to a wide range of investment categories. Most investors can build a diversified portfolio with as little as two or three ETFs, but a range of five to 10 ETFs may be more appropriate for other investors.
The Seven Best Vanguard ETFs to Build Your Portfolio
One good portfolio structure is called "core and satellite," which means you'll allocate the largest percentage of your portfolio to one or two core funds, such as an S&P 500 Index fund or a total bond market index fund, and smaller percentages to satellite holdings, such as foreign stock funds and sector funds.
With that backdrop, here are seven Vanguard ETFs to build a complete portfolio:
- Vanguard S&P 500 ETF (VOO): To lay the foundation of your Vanguard ETF portfolio, a low-cost S&P 500 index ETF like VOO is a smart choice. When you hold a fund like VOO, you get access to roughly 500 stocks of the largest U.S. companies like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT). Expenses for VOO are 0.03%.
- Vanguard Extended Market ETF (VXF): To complement VOO, and complete your exposure to the U.S. stock market, VXF holds all of the U.S. stocks that are not in the S&P 500. Rather than buy VOO and VXF, some investors prefer to buy a total stock market index fund. However, the combination of VOO and VXF can provide more exposure to mid- and small-cap stocks than a total stock index fund would provide. That allows for greater diversification and more control over the allocation for the investor. The expense ratio for VXF is 0.06%.
- Vanguard Total International Stock ETF (VXUS): To extend your stock exposure outside of the U.S., VXUS tracks an index with over 6,000 foreign stocks, most of which are large-caps in Europe. Shareholders also get exposure to emerging markets. The expenses for VXUS are 0.08%.
- Vanguard Total Bond ETF (BND): For broad exposure to the U.S. bond market, BND is all you need. By tracking the Bloomberg U.S. Aggregate Float Adjusted Index, BND provides exposure to more than 9,000 bonds of various maturities. You'll also get different types of bonds, including corporate, municipal, and U.S. Treasury bonds. Expenses for BND are just 0.035%.
- Vanguard Health Care ETF (VHT): As part of your sector exposure, VHT is an outstanding way to get low-cost exposure to the health care sector. When investing in sectors, a long-term investor is wise to find those that have good long-term growth potential. Arguably, when considering advances in medicine and the aging of the U.S. population, health stocks could be market leaders for decades to come. Expenses for VHT are 0.10%.
- Vanguard Information Technology ETF (VGT): Another sector that will likely lead capital markets in the coming decades is technology. To take advantage of the historic trend and future growth potential, VGT passively tracks a basket of over 300 technology stocks. Expenses are just 0.10%.
- Vanguard Energy ETF (VDE): The energy sector can potentially be a leading sector in the long term, especially if the world continues its reliance on oil and fossil fuels. The top holdings in VDE include big oil companies like Exxon Mobil (XOM). Even if energy is not a top performer, the sector can add diversity to a portfolio. Expenses for VDE are 0.10%.
Frequently Asked Questions (FAQs)
What's the difference between VOO and VFIAX?
The Vanguard S&P 500 ETF (VOO) is the ETF version of the Vanguard 500 Index Fund (VFIAX). In terms of investment goals and market exposure, VOO and VFIAX are the same. However, there are differences between ETFs and mutual funds, including how they are taxed and traded. Those are the differences between VOO and VFIAX.
How do you hedge a portfolio with ETFs?
Diversification is a hedging strategy of its own, so you will do some hedging simply by using the ETFs described here to build a core and satellite portfolio. If that isn't enough, and you have an aggressively bearish sentiment, you can hedge your portfolio with inverse ETFs. For example, if you want to aggressively hedge against your long-term VOO holdings, then you could use an inverse S&P 500 ETF like SPXS.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.