Hi. I’m Ben Johnson, director of global ETF research for Morningstar, and today I’m here to talk about what makes a core ETF, how core ETFs are used, and share three core ETFs that we like and tell you a bit about why.
So what is a core ETF?
You can think of core ETFs as the foundation of your portfolio. No different from your house, you want this foundation to be broad, to be stable, and durable—something that will stand the test of time.
Core ETFs cover major asset classes--like U.S. and foreign stocks and high-quality bonds. They're broadly diversified, and ideally they also charge low fees.
So how can investors use core ETFs?
At the risk of stating the obvious, core ETFs should feature at the core of an investor’s portfolio. For many investors, these funds make up the bulk of their portfolio. For some, they can be the only components of a well-diversified portfolio.
So let's talk a little bit about three core ETFs that we at Morningstar like and why?
Three of our favorite core ETFs are featured in the Basic Portfolio—this is a model portfolio of ETFs that we regularly feature in the Morningstar ETFInvestor newsletter.
These three funds are the Vanguard Total Stock Market ETF VTI, Vanguard Total International Stock ETF VXUS, and Vanguard Total Bond Market ETF BND. In fact, that’s all there is to this portfolio—just these three funds, which together give investors exposure to nearly every investable stock on the planet and the full spectrum of investment-grade U.S. bonds, all for a very tiny fee.
These three funds embody the best traits of core ETFs: They’re broadly representative of the asset classes they cover, they’re cheap, and they’re also incredibly tax-efficient to boot.