The Power of ETFs

The most important guidance I can give you about investing is to:

  1. Save your money
  2. Diversify your investments
  3. Lower your costs

For those reasons, I like to invest using ETFs (exchange traded funds). These assets are sometimes called ‘index funds’ because they track the whole index of firms that fit into a defined industry, sector, or category. They allow you to invest in hundreds of companies per asset, while spending very little for that privilege.

Consider this Sample Portfolio
Investment Name Category Portion Cost
VANG TOT INTL STK IS  (VTSNX) International Stocks 25% 0.090%
FID 500 INDEX INST  (FXSIX) Large Cap Stocks 25% 0.035%
VANG MIDCAP IDX INST  (VMCIX) Mid-Cap Stocks 25% 0.050%
VANG SM CAP IDX INST  (VSCIX) Small Cap Stocks 25% 0.050%
Account Total   100% 0.056%

You may be thinking that this portfolio is too small to be considered ‘diversified’, but it is well diversified due to the genius of ETFs. Lets take a look at the first ETF. This is the ‘Vanguard Total International Stock Market’ index, which has holdings in 6,129 non-US stocks. Similarly, the second ETF invests in the 500 largest US companies (aka Large-Cap stocks). All told, this sample portfolio invests in almost 9,000 stocks -or to put it another way- it has ownership stakes in nearly every reputable publicly traded company on the planet! That is a remarkable achievement for a simple portfolio of just 4 investments.

Lower Costs
We all know that Wall Street stock brokers are filthy rich. It’s not because they have special market insight or because their magic balls see the future. No, they get rich by collecting high fees from clients. They make bold promises about amazing returns, but those rarely materialize. Stock brokers get rich and we lose out. This truth was revealed in the aftermath of the 2009 crash, from which Wall Street has bounced back from but Main Street is still recovering.

Hedge funds traditionally charge an annual management fee of 2% plus a 20% cut of your profits.  Mutual funds cost less -around 1% expense ratio- for a team of managers to make trades on your behalf. Those fees come out of your profits. My sample ETF portfolio (above) costs just 0.056%. That’s a real bargain at just 56¢ for every $1,000 invested. I choose ETFs in order to control my investments’ costs, because we all know we can’t control an investment’s performance.

If you want a well-diversified, low cost portfolio… choose ETFs.