An Aggressive Retirement Saver Portfolio for ETF Investors
An all-passive portfolio for investors with very long time horizons.
Investors often look to Morningstar for a definitive answer on whether they should employ actively managed mutual funds or simple low-cost index funds and exchange-traded funds.
The answer, alas, isn't black and white. Assuming an investor focuses on low-cost funds (whether active or index), creates a sound asset-allocation plan, and doesn't undermine his or her results by buying high and selling low, it's possible to create a successful portfolio plan using an all index funds, all actively managed products, or some of both.
I've created model portfolios for accumulators that consist of traditional mutual funds; there are portfolios for aggressive, moderate, and conservative investors who are building assets for their retirement. But an all (or mostly all) ETF portfolio can be a cost-effective, low-maintenance way to go, too.
I've thus developed portfolios with similar allocations--aggressive, moderate, and conservative--that are instead composed of passively managed products. As with the actively managed portfolios, I've used Morningstar's Lifetime Allocation Indexes to guide the ETF portfolios' stock and bond mixes, and I relied on our passive strategies researchers to help select the holdings.
The Portfolio Details
This portfolio uses the aggressive version of the Morningstar Lifetime Allocation Index geared toward investors retiring in 2055. Such an investor could reasonably use a total U.S. stock market index fund and a total international stock market index fund--and perhaps a dash of bond exposure via a Barclays Aggregate tracker--and call it a day. Employing broadly diversified funds is the best way to keep a portfolio's costs down. And by limiting the number of moving parts in a portfolio, an investor might also squelch his or her impulse to make unnecessary trades.
I used a total U.S. and total international index fund as the anchors for the portfolio, but supplemented them with dedicated exposure to domestic small-cap value and emerging-markets stocks. Of course, a total market tracker will also supply a dose of small-value stocks--roughly 3% of total assets--but I added additional exposure in recognition of the fact that value stocks--and small-value, in particular, have historically delivered a slight performance edge relative to large.
I also employed separate developed- and developing-markets exposure, as holding discrete developing and developed components can help facilitate rebalancing when mature markets outpace developing--and vice versa. And perhaps even more importantly, the developed-markets index fund is cheaper than a total stock market index fund, so holding the two funds is just as cost-effective as holding Vanguard FTSE All-World ex-US ETF (VEU).
5%: iShares Core Total USD Bond Market ETF (IUSB)
How to Use
Note that these portfolios aren't designed to shoot out the lights over short time frames. Rather, the goal is to depict sensible asset-allocation mixes for investors at varying life stages and to show how to put Morningstar's best ETF ideas into action.
I'll employ a long-term, hands-off approach to portfolio maintenance and will only make changes if something has fundamentally changed with one of the holdings. Because index products almost never undergo any substantive changes, I would expect to make even fewer alterations to the ETF portfolios than I will to the actively managed ones.
It's also worth noting that investors can employ similar traditional index mutual funds in place of the exchange-traded funds featured in these portfolios. Equity exchange-traded funds will generally be more tax-efficient over time than comparable index mutual funds, but both types of products are extremely tax-efficient. And while this portfolio tilts heavily toward Vanguard's ETF lineup, investors might reasonably employ a similar basket of ETFs from other providers. (Price wars have benefited investors, with fund shops trading off leadership for the lowest-cost index funds on offer.)
Finally, investors who wish to hold the portfolios inside of a taxable account should consider using total U.S. and foreign-stock ETFs for equity exposure and a municipal bond fund for the bond exposure (or foregoing bonds altogether) for the taxable portion of their portfolios.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.