Chapter 19
All-In-One ETFs: For the Ultimate Lazy Portfolio
IN THIS CHAPTER
Realizing that investing need not be complex
Building a portfolio with few moving parts
Teaming up with the best ETF providers for your needs
There’s a lot of academic research, shared throughout this book, that provides reasons for you to construct a portfolio with stocks and bonds from around the world, allocated to your portfolio in a way that makes sense for you personally. This means building your portfolio with the right amount of aggressiveness (stocks) and the right amount of protectiveness (bonds and cash). It also means constructing your portfolio in such a way as to maximize return while minimizing risk. Decades of good data allow you to do that.
The optimal mix for you is unlikely to be the same optimal mix as it might be for, say, your parents, or for Joe on your Twitter feed, or for your dermatologist. Nor may the optimal mix for you necessarily be an exact replica of a market-weighted, total-world portfolio.
But for those who love simplicity, and who are willing to accept what may be less than optimal, ETFs offer a way to build a portfolio with very, very few moving parts.
In this chapter, I present several of the simplest portfolio construction options — all-world stock funds and all-world bond funds. As is the case for most stock funds sold in America that include international stocks, there will be some currency fluctuations with these two types of all-world stock funds. And, as with most bond funds sold in America that include international bonds, the currency flux is hedged or (theoretically) eliminated with the all-world bond funds. (I explain why hedging is more appropriate for bonds than stocks in Chapter 15.)
And then — for those who really, really want simplicity — I present a few all-world-stock-and-bond-combined funds. Heck, most wealth managers wouldn’t want you to know this, but you can build a fairly well-diversified portfolio with only one holding. Buy it. Go play tennis. Let the markets work for you.
There are two kinds of all-asset funds: static versions where the percentages of, say, stocks and bonds remain stable, and funds where the percentages change over time, known as “lifecycle” or “target-date” funds.
Now, I present you with a short menu of some of your options.
Buying into the World’s Stock Markets in a Flash
If you want instant exposure to the largest possible number of stocks, including U.S. and all sorts of foreign stocks (from both developed and emerging-market countries), your best options come from Vanguard and State Street SPDRs. Either of the following two ETFs will give you an excellent representation of the world’s stocks at a very reasonable cost.
Both ETFs are based on market-weighted indexes, which means that you’ll be getting a lot more large-cap than you will small-cap. It also means, given the run-up in capitalization of tech in the past several years, that your portfolio may have a lean toward growth. (If you’ll recall from Part 2, value stocks actually outperform growth in the long haul.) And given the recent outperformance and rise in capitalization of large U.S. companies — more like a handful of large U.S. companies (Apple, Microsoft, Amazon, Alphabet, and Facebook) — these all-world portfolios are now about 58 to 59 percent concentrated in but one country. Sure, it’s a great country — with the Grand Canyon, Walt Disney World, and Bruce Springsteen — but it is still just one country. And as I know from years of tracking stock-market performance, U.S. stocks outperform foreign, then foreign stocks outperform U.S, then…ad infinitum.
Vanguard Total World Stock ETF (VT)
Indexed to: The FTSE Global All Cap Index
Number of stocks: 9,074
Expense ratio: 0.08 percent
Geographic breakdown: U.S. 58 percent/Non-U.S. 42 percent
Top 5 holdings: Apple, Microsoft, Amazon, Alphabet, Facebook. (These five giants make up 9.5 percent of the total portfolio.)
Hedged against currency flux: No
SPDR Portfolio MSCI Global Stock Market ETF (SPGM)
Indexed to: The MSCI ACWI IMI Index. (ACWI stands for All Country World Index; IMI stands for Investable Market Index.)
Number of stocks: 2,307
Expense ratio: 0.09 percent
Geographic breakdown: U.S. 59 percent/Non-U.S. 41 percent
Top 5 holdings: Apple, Microsoft, Amazon, Alphabet, Facebook. (These five make up 11.9 percent of the total portfolio.)
Hedged against currency flux: No
Putting the World’s Bond Markets at Your Fingertips
If you buy into an all-world stock ETF, such as one of the two introduced in the previous section, you’ll want, if you’re smart, to marry it to an all-world bond ETF. As I think I’ve made clear throughout this book, and others I’ve written, a portfolio with only stocks or only bonds is like a bicycle with but one wheel — you may move forward, but the going won’t be easy, and you can easily topple over.
I present two good bond options here. One, the Vanguard option, is super low-cost, with incredible diversification, with more bonds than there are words in the Declaration of Independence and the Constitution combined. Nothing not to like.
The second, the iShares Global Green Bond ETF, costs a bit more, but you get to promote a cleaner world. It is one of my favorite ESG funds. (See more about ESG funds in Chapter 17.) Both of these funds, like nearly all aggregate bond funds, offer a mix of federal government, agency, and private bonds. But these are all taxable bonds — no tax-free munis — so these babies are best kept nestled in tax-advantaged accounts, such as an IRA.
Vanguard Total World Bond ETF (BNDW)
Indexed to: The Bloomberg Barclays Aggregate Float Adjusted Composite Index. This is a fund of funds, combining Vanguard’s Total International Bond ETF (BNDX) with Vanguard’s Total Bond Market Index Fund (BND).
Number of bonds: 16,430
Average credit quality: A
Average duration: 7.6 years
Expense ratio: 0.06 percent
Geographic breakdown: U.S. 47 percent/Non-U.S. 53 percent
Hedged against currency flux? Yes
iShares Global Green Bond ETF (BGRN)
Indexed to: The Bloomberg Barclays MSCI Global Green Bond Select (USD Hedged) Index, which is composed of global bonds that are issued specifically to help fund environmental projects.
Number of bonds: 590
Average credit quality: Between A and AA
Average duration: 8.4 years
Expense ratio: 0.20 percent
Geographic breakdown: U.S. 10 percent/Foreign 81 percent. Top countries are France with 20 percent and Germany with 14 percent. The remaining 9 percent are “supranational” bonds, issued by institutions such as the International Bank for Reconstruction, the European Investment Bank, and the International Finance Corporation.
Hedged against currency flux? Yes
Buying Stocks and Bonds in One Shot
Don’t want to hold even two funds, but rather just one? Here are ETFs that will give you exposure not only to the entire world of stocks but to bonds as well. They are called asset allocation funds, and they come in two distinct varieties.
Some asset allocation funds are static, meaning there’s a division between global stocks and bonds that stays more or less the same for the life of the fund (for example, 60 percent stocks and 40 percent bonds). These static funds may sometimes be referred to as target-risk funds. The folks from iShares offer eight of these allocation funds, State Street Global Advisors SPDRs offer three, and Invesco offers a handful of actively managed options, if you want to go that route.
iShares asset allocation funds
The largest ETF provider offers the largest number of asset allocation funds — stocks and bonds galore, all in a single ETF. You just need to choose the one with the right amount of aggressiveness — the higher the percentage of stocks, the more aggressive — and whether you want a twist of ESG.
Plain-vanilla funds
- iShares Core Aggressive Allocation ETF (AOA): 80 percent stocks/20 percent bonds
- iShares Core Growth Allocation ETF (AOR): 60 percent stocks/40 percent bonds
- iShares S&P Moderate Allocation ETF (AOM): 40 percent stocks/60 percent bonds
- iShares Core Conservative Allocation ETF (AOK): 30 percent stocks/70 percent bonds
Funds with a twist of ESG
- iShares ESG Aware Aggressive Allocation ETF (EAOA): 80 percent stocks/20 percent bonds
- iShares ESG Aware Growth Allocation ETF (EAOR): 60 percent stocks/40 percent bonds
- iShares ESG Aware Moderate Allocation ETF (EAOM): 40 percent stocks/60 percent bonds
- iShares ESG Aware Conservative Allocation ETF (EAOK): 30 percent stocks/70 percent bonds
The first four funds, all introduced in 2008, carry net expense ratios of about 0.25 percent and offer varying exposure to global stocks and bonds, depending on how aggressive or conservative a portfolio you want. The next four funds offer similar mixes, using ESG criteria, and were introduced in 2020. They carry net expense ratios of 0.18 percent. Yep, the “do good” options, somewhat paradoxically (because you’d think they would require more managerial effort and brainpower) cost less and are guaranteed to remain less until November 2025. At that point, they may cost the same as the non-ESG options.
Given the price difference, I can see no reason not to go with the ESG versions, unless you have a strong reason to believe that companies that emit lots of soot into the air are going to see higher stock performance. (Okay, I’m simplifying ESG criteria. For a more in-depth explanation, go to Chapter 17.) There’s also a smallish (3 percent) position in international bonds provided by the non-ESG lineup, but not the ESG lineup. My guess is that this oversight will be corrected over time.
All eight of these asset allocation funds are actually funds-of-funds, made up of other iShares ETFs. There’s nothing wrong with that. For the specifics, go to iShares.com. The expenses you see include the fees for both the component funds and the all-in-one fund wrapper.
In the case of the iShares ESG Aware Growth Allocation ETF (EAOR), for example, you would be getting a mix and match of five other iShares ETFs (iShares ESG Aware MSCI USA ETF [ESGU], iShares ESG Aware US Agg Bond ETF [EAGG], iShares ESG Aware MSCI EAFE ETF [ESGD], iShares ESG Aware MSCI EM ETF [ESGE], iShares ESG Aware MSCI USA Small-Cap ETF [ESML]), along with a BlackRock (the parent company of iShares) cash fund.
State Street Global Advisors SPDRs: Three asset allocation options
It may not pop out at you right away how the three State Street Global Advisors options differ in terms of aggressiveness (just like the iShares options). The first option on the list is fairly aggressive. The second is decidedly middle-of-the-road aggressive. The third is a strange bird, but certainly aggressive. In fact, all three are a bit strange. Not necessarily bad, but worthy of discussion.
- SPDR SSGA Global Allocation ETF (GAL): 76 percent stock/24 percent bonds*
- SPDR SSGA Income Allocation ETF (INKM): 50 percent stock/50 percent bonds*
- SPDR SSGA Multi-Asset Real Return ETF (RLY): 88 percent stock/12 percent bonds*
So why all the asterisks after the percentages? Starting with the SPDR SSGA Global Allocation ETF (GAL), the fund actually has about 67 percent stock. But it also holds about 5 percent commodities, 5 percent high-yield (junk) bonds, and 1 percent emerging-market debt. Commodities can be as volatile as stocks, and high-yield and emerging-market bonds can be almost as volatile. So when I say, “76 percent stock,” that is my ballpark estimate of just how aggressive this fund is. To my reckoning, it would have roughly the same volatility as a typical 76/24 (stock/bond) portfolio. The management fee is 0.35 percent.
The second ETF on the list, the SPDR SSGA Income Allocation ETF (INKM), also has an asterisk because while it technically holds only about 36 percent stock, it also has some exposure to high-yield bonds (U.S. and emerging market) and leveraged loans. I’d say it has roughly the risk attributes of a 50/50 (stock/bond) portfolio. The management fee is, unfortunately, on the high side: 0.50 percent.
The third ETF on the list, the SPDR SSGA Multi-Asset Real Return ETF (RLY), offers a bevy of investments geared toward protection if inflation rages. The bonds are Treasury inflation-linked securities, the portfolio includes a large basket of commodities (about 25 percent of the total), and the stocks are in “natural resources,” “global infrastructure,” and “real estate.” The management fee is a fairly hefty 0.50 percent. Unless you go to bed at night tossing and turning over the fear of inflation, I can’t recommend this fund, even though I expect it will do a good job of keeping ahead of inflation. The commodities and the natural resources stocks will tend to move in the same direction, and that makes this fund awfully risky, whereas if inflation doesn’t rage, the returns are likely to be quite tepid.
Invesco’s actively managed “target-risk” ETFs
Chapter 18 is all about actively managed ETFs, and why I generally avoid them, in good part because they tend to cost you more than any benefit derived from the active management. But in the topsy-turvy world of fund pricing, sometimes you find actively managed funds that are cheaper than passively managed (index) funds. Invesco’s actively managed asset allocation funds, or “target-risk” ETFs, are less expensive than the passively run SPDRs, although more expensive than iShares’ asset allocation funds.
Unfortunately, these funds feature another sad characteristic of active funds: They are active! In other words, they are always changing per the manager’s discretion. Note that even the general risk level of these funds can change dramatically from day to day. One day, you might find your fund holds 50 percent stock, and the next day, 60. I don’t especially like going to bed at night not knowing.
The Invesco asset allocation funds are funds-of-funds, made up of varying percentages of other Invesco funds, such as the Invesco RAFI Strategic US ETF (IUS), the Invesco Variable Rate Investment Grade ETF (VRIG), and the Invesco Preferred ETF (PGX). There are more asset classes in these funds than in either the SPDRs or the iShares multi-asset funds.
The funds have been in existence since 2017, not nearly long enough to see if the active management will pay off in the very long run. In the short run? The most aggressive growth portfolio (PSMG) has returned 12.3 percent over the past three years, and the least aggressive conservative portfolio (PSMC) has returned 7.6 percent. This compares, sort of, to the iShares growth portfolio (AOR), which has a three-year return of 10.6 percent, and the iShares conservative portfolio (AOK), which has a three-year return of 8.0 percent. I say “sort of” because you simply don’t know with actively managed funds how much risk you’ve taken in order to get your return.
Here are the funds, from most to least aggressive.
- Invesco Growth Multi-Asset Allocation ETF (PSMG): 65 to 95 percent in equity (stock) ETFs.
Invesco Balanced Multi-Asset Allocation ETF (PSMB): 45 to 75 percent in equity (stock) ETFs.
Invesco Moderately Conservative Multi-Asset Allocation ETF (PSMM): 25 to 55 percent in equity (stock) ETFs.
- Invesco Conservative Multi-Asset Allocation ETF (PSMC): 5 to 35 percent in equity (stock) ETFs.
The expense ratios on these funds differ a bit: PSMG is 0.30 percent; PSMB is 0.32 percent; PSMM is 0.33 percent; and PSMC is 0.36 percent. Because the funds have the same component ETFs, except in different-size helpings, it appears that the more conservative component ETFs are somewhat more expensive than the more aggressive component ETFs.
Multi-asset funds that change as you age
If a fund seeks to change its asset allocation over time, growing more conservative as you get older and less able or willing to handle market risk, it may be called a lifecycle or target-date fund (rather than a target-risk fund). A few of these babies were designed and issued as ETFs by both iShares and Deutsche Bank. They have been discontinued, undoubtedly for lack of demand. And with what I have to say, I’m not going to raise the demand back up! But do know that if you really want a lifecycle fund, there are plenty to be found in the mutual-fund universe. I talk of how to incorporate mutual funds and other investment vehicles into your portfolio in Chapter 25.
Why wasn’t there enough demand to keep the lifecycle ETFs up and running? One Morningstar official told me that it was likely because these funds are typically used in tax-advantaged employer-sponsored retirement programs, where tax efficiency (one of the strengths of ETFs) is moot, and everything is computed in dollars (more compatible with mutual funds), rather than shares. Also, wealth managers may be loath to suggest lifecycle funds to their clients. “Sending clients a quarterly statement with a single line item doesn’t appeal to many advisors,” said the man from Morningstar. A very good point.
Russell’s average review for the average reader on an average day
“For every complex problem,” said H. L. Mencken, “there is an answer that is clear, simple — and wrong.” Certainly, finding the optimal portfolio is a complex problem. The all-in-one ETFs and mutual funds that I discuss in this chapter provide an answer that is clear, simple — and usually wrong. Oh, I suppose if you were the average 50-year-old, with the average amount of money, looking to work an average number of years, expecting to die at the average age, and you were willing to take on an average amount of risk…well, if you were all those things and planned on remaining forever average, an all-in-one fund might make sense for you.
But if you are anything other than perfectly average, I urge you to move on to Part 5 of this book whenever you feel ready. Take a look at my model portfolios and craft an ETF portfolio that makes sense for you.