The 7 ETFs to Buy for the Perfect Portfolio
A recent MarketWatch article discussed a simple portfolio from Leuthold & Co. Chief Investment Officer Doug Ramsey that delivered for investors over the past 50 years. The All Asset No Authority (AANA) portfolio provided investors with returns that were on par with the S&P 500, but with significantly less risk, by investing equal amounts in seven different asset classes: U.S. large-cap stocks, U.S. small-cap stocks, U.S. 10-year Treasury notes, U.S. real estate investment trusts, international stocks, commodities and gold. Using the seven ETFs to buy below, you can make your own AANA portfolio.
Ramsey would invest approximately 14.3% of the cash in each of the seven asset classes. Then, once a year, he would rebalance the holdings to their original 14.3% weighting.
“One of his remarkable findings about these seven asset classes is that in any given year, your best single investment was likely to be the one that had done second best the year before. In other words, last year’s silver medalist was likely to be this year’s gold medalist,” wrote MarketWatch’s Brett Arends.
Thus, Ramsey decided to run the numbers for a revised AANA portfolio in which 12.5% was invested in six of the seven asset classes, while 25% was invested in the previous year’s second-best performer. The result was even better returns for less risk over the past five decades.
The seven ETFs to buy below can be used to create your own AANA portfolio. And if you want to give the revised AANA portfolio a try, last year’s second-best performer was gold.
|IVV||iShares Core S&P 500 ETF||$412.67|
|SCHA||Schwab U.S. Small-Cap ETF||$45.52|
|DFAI||Dimensional International Core Equity Market ETF||$27.45|
|VNQ||Vanguard Real Estate ETF||$91.62|
|SPTL||SPDR Portfolio Long Term Treasury ETF||$31.37|
|DBA||Invesco DB Agriculture Fund||$20.09|
|GLD||SPDR Gold Shares||$181.67|
iShares Core S&P 500 ETF (IVV)
The iShares Core S&P 500 ETF (NYSEARCA:IVV) is the largest of the seven ETFs to buy listed here. It has net assets of $307.3 billion and charges a fee of just 0.03%, or 30 cents per $1,000 invested in IVV.
As the name suggests, it tracks the performance of the S&P 500, which means you get a tiny sliver of ownership in 500 of America’s largest companies. Unfortunately, this past year wasn’t a good one for IVV investors. It had a total return of -18.1%, its worst year since 2008.
IVV’s top three sectors by weighting are information technology (26.4%), health care (14.6%) and financials (11.7%). These are three sectors you always want in a long-term portfolio. The top 10 holdings account for nearly 25% of its net assets. The weighted average market capitalization of $470 billion puts it squarely in the large-cap category
Of all the ETFs to buy in this article, IVV is the one Warren Buffett would likely endorse for the average investor. As I’ve written in the past, Buffett believes that the typical retail investor ought to buy a low-cost fund that tracks the S&P 500 and call it a day.
Schwab U.S. Small-Cap ETF (SCHA)
Next up on our list of ETFs to buy is the Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA). It has net assets of $14.7 billion, not nearly as large as IVV, but substantial nonetheless. And it is slightly more expensive than IVV at 0.04%, or 40 cents per $1,000 invested.
The ETF tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index, a collection of more than 1,760 small-cap stocks. As a passive ETF, the portfolio turnover rate is less than 10% yearly.
If you define small-cap stocks as those with market caps between $300 million and $2 billion, you might think the ETF’s weighted average market cap of $3.7 billion makes it more of a SMID-cap fund.
The ETF’s top three sectors by weight are industrials (17.3%), financials (16.8%) and health care (14.1%). Of the fund’s top 10 holdings, Churchill Downs (NASDAQ:CHDN) is my favorite stock, accounting for 0.24% of the net assets. The top 10 holdings combined account for just 2.5% of the portfolio.
Over the past five years, SCHA underperformed IVV with an annualized return of 6% versus 9.5% for IVV. However, I expect that trend to reverse in the next five years.
Dimensional International Core Equity Market ETF (DFAI)
Representing international stocks is the Dimensional International Core Equity Market ETF (NYSEARCA:DFAI). The ETF’s benchmark is the MSCI World ex USA IMI Index. It charges 0.18% and has net assets of $3 billion.
As soon as I checked the fund’s top 10 holdings, I knew this was one of the ETFs to buy. DFAI’s two top holdings — Nestle (OTCMKTS:NSRGY) and LVMH (OTCMKTS:LVMUY) — are two of my top three global stocks to buy to get around America’s slowdown. Novo Nordisk (NYSE:NVO) was my third pick. It’s the ETF’s sixth-largest holding.
Like IVV, DFAI is made up of many large-cap stocks. While its weighted average market cap of $61.2 billion is smaller than IVV’s, it’s plenty big enough.
DFAI’s top three sector allocations are financials, accounting for 19%, industrials at 16.9%, and consumer discretionary at 11.2%. Geographically, Japan is the largest country by weight at 21.9%, followed by the UK at 13% and Canada at 11.2%.
Vanguard Real Estate ETF (VNQ)
REITs struggled in 2022, and the Vanguard Real Estate ETF (NYSEARCA:VNQ) was no exception, falling 26.2% last year.
With interest rates expected to remain high through most, if not all, of 2023, real estate might not be a top performer in 2023. However, year to date, VNQ is up 11.1% compared with 7.4% for IVV.
VNQ is a relatively concentrated portfolio, with its top 10 holdings accounting for 37.4% of its $33.3 billion in net assets. The median market cap is $22.9 billion, making it either a small large-cap fund or a large mid-cap fund. It’s your call.
The ETF tracks the performance of the MSCI US Investable Market Real Estate 25/50 Index. It charges a reasonable 0.12% annually, giving VNQ shareholders a tiny piece of 167 REITs. Its largest category by weighting is specialized REITs at 37.7%, followed by residential REITs at 13.7% and retail REITs at 13%.
SPDR Portfolio Long Term Treasury ETF (SPTL)
Representing the long-term 10-year Treasury is the SPDR Portfolio Long Term Treasury ETF (NYSEARCA:SPTL). It tracks the performance of the Bloomberg Long U.S. Treasury Index, which is a collection of long-term Treasuries with remaining maturities of 1o years or greater.
The average maturity is 23.18 years, so it’s not a perfect match. However, I went with SPTL instead of the iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) because its average maturity is 8.4 years, more than a year and a half short.
You could always split your Treasury allocation equally between SPTL and IEF. They’re both inexpensive, with the former charging 0.06%, while the latter’s expense ratio is 0.15%.
Morgan Stanley released a report in November suggesting bonds might be a better bet in 2023 than equities, so it wouldn’t hurt to have some fixed-income exposure. The AANA portfolio’s performance over the long haul is a compelling argument for including long-term Treasuries.
Invesco DB Agriculture Fund
Invesco DB Agriculture Fund (NYSEARCA:DBA) is the most expensive of the seven ETFs, with an expense ratio of 0.91%, or $91 per $1,000 invested.
The fund tracks the performance of the DBIQ Diversified Agriculture Index Excess Return, which is intended to reflect the change in value of the agriculture sector. It uses futures contracts on 11 different commodities: corn, soybeans, wheat, Kansas City wheat, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hog.
Given there are more moving parts with DBA, it’s understandable that its expense ratio is much higher than some of today’s other ETFs to buy. But that’s the point of buying ETFs. They give you the expertise you lack while diversifying your portfolio.
Since its inception in January 2007, DBA’s annualized total return through Dec. 31, 2022, is -0.93%. However, over the past three years, its annualized return is 7.2%. Therefore, consider it a defensive part of your portfolio.
Offense and defense win games. The same is true when it comes to investing.
SPDR Gold Shares (GLD)
You can’t have an all-weather portfolio without gold. In times of inflation, it’s one asset class that’s retained its value. CNBC investment pundit Jim Cramer typically puts 5% of his personal portfolio in gold because you never know what will happen down the road that makes paper currency less valuable.
To invest in gold through ETFs, the granddaddy of gold funds is SPDR Gold Shares (NYSEARCA:GLD). It has a long history given that it began trading in November 2004. Today, it has nearly $53.5 billion in net assets, charging 0.40% annually.
Over the past three months, GLD has had a total return of 18.1%, considerably higher than the markets. Over the past 10 years, its performance isn’t nearly as good, generating a 1.1% total return.
However, like bonds and commodities, it has its place in an investment portfolio. And if Ramsey’s findings hold true in 2023, gold may be the year’s best-performing sector.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.