While many investors succeed with a simple two-fund portfolio giving them ownership of a lot of stocks -- perhaps just the Vanguard S&P 500 ETF (VOO 0.39%) and Vanguard Total Bond Market ETF (BND 0.38%) -- I've taken a more nuanced approach. My strategy involves three distinct portfolios, each designed with specific goals: aggressive growth, retirement income, and a balanced blend that encompasses multiple asset classes.
Throughout these portfolios, I leverage nine carefully selected Vanguard exchange-traded funds (ETFs). Each serves a unique purpose, from capturing technology sector growth to generating steady dividend income. Here's why I own each one.
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1. The foundation
The Vanguard S&P 500 ETF sits at the heart of my blended portfolio, tracking the 500 largest U.S. companies. With its microscopic 0.03% expense ratio and current yield of 1.3%, this fund provides instant diversification across sectors at virtually no cost. Since its inception, the fund has delivered approximately 13.8% average annual returns.
What makes this fund essential isn't just its performance -- it's the stability it brings. By holding America's corporate giants, including Apple, Microsoft, and Berkshire Hathaway, this ETF serves as my portfolio's bedrock. The beauty lies in its simplicity: One purchase gives me exposure to 500 companies representing roughly 80% of the U.S. stock market's value.
2. Return amplification
While the S&P 500 fund provides broad market exposure, the Vanguard S&P 500 Growth ETF (VOOG 0.32%) concentrates on growth stocks within the S&P 500. This fund screens for companies with strong sales growth, earnings momentum, and price appreciation potential. With a still-reasonable 0.07% expense ratio, it offers targeted growth exposure without breaking the bank.
The fund has outperformed the broader S&P 500 over the prior 10 years, delivering approximately 15% average annual returns since its inception. I hold the Vanguard S&P 500 Growth ETF in my growth portfolio to capture additional upside during bull markets.
3. Global income generation
Diversification shouldn't stop at U.S. borders. The Vanguard International High Dividend Yield ETF (VYMI 0.47%) provides exposure to high-yielding stocks from developed and emerging markets outside the United States. Currently yielding around 4.3%, it offers a significantly higher yield than most domestic, dividend-focused funds, while offering geographic diversification.
With holdings spanning over 1,500 international stocks and an expense ratio of 0.17%, the Vanguard International High Dividend Yield ETF adds both income and international exposure to my blended and growth portfolios. It helps reduce home country bias while capturing dividend income from established global companies.
4. Technology sector concentration
Technology drives modern economic growth, and the Vanguard Information Technology ETF (VGT 0.38%) provides concentrated exposure to this crucial sector. Holding companies across software, hardware, semiconductors, and IT services, this fund has delivered exceptional performance with approximately 18% average annual returns over the prior 10 years.
Despite its 0.09% expense ratio, the Vanguard Information Technology ETF remains cost-effective compared to actively managed technology funds. I maintain this position in my growth portfolio, recognizing that while sector concentration increases risk, the technology sector's unparalleled growth potential justifies the allocation.
5. Alternative asset exposure
Real estate offers both income and diversification benefits. The Vanguard Real Estate ETF (VNQ 0.90%) provides exposure to real estate investment trusts (REITs), which own and operate income-producing properties. I hold this fund in my retirement income portfolio primarily for its substantial dividend yield of 4.1%.
On the performance side of the ledger, this Vanguard ETF has delivered approximately 5.2% average annual returns over the prior 10 years. The Vanguard Real Estate ETF also sports a rock-bottom expense ratio of 0.13%, compared to an industry average of 1.15%. Though more volatile than bonds, real estate provides crucial inflation protection and moves independently from stocks and bonds, making this ETF a valuable portfolio diversifier.
6. High-growth potential
Emerging markets represent tomorrow's economic powerhouses. The Vanguard FTSE Emerging Markets ETF (VWO 0.44%) provides exposure to nearly 6,000 stocks across developing economies like China, India, and Brazil. With an incredibly low 0.07% expense ratio, the Vanguard FTSE Emerging Markets ETF offers cost-effective access to high-growth potential regions.
While volatility remains higher than in developed markets, the fund has delivered approximately 3.3% average annual returns over the prior 10 years. That's not market-beating, but it is a steady gain in a space that holds tremendous long-term potential. I hold the Vanguard FTSE Emerging Markets ETF in my growth portfolio, accepting its above-average volatility and long-term investing thesis.
7. Size advantages
The Vanguard Small-Cap ETF (VB 0.24%) provides exposure to over 1,300 smaller U.S. companies for just a 0.05% expense ratio. While small companies have historically outperformed large ones over very long periods, this hasn't been the case recently. The fund has delivered approximately 7.6% average annual returns over the prior 10 years, significantly trailing the S&P 500's performance.
I still hold the Vanguard Small-Cap ETF in my growth portfolio because market cycles rotate. Small caps tend to outperform coming out of recessions and during certain economic conditions. After nearly two decades of large-cap dominance, I'm positioning for potential mean reversion while accepting the higher volatility that comes with smaller companies.
8. Stability anchor
Every portfolio needs ballast, and the Vanguard Total Bond Market ETF provides it. This fund holds thousands of U.S. investment-grade bonds, including government, corporate, and mortgage-backed securities. Currently yielding 4.5% with a 0.03% expense ratio, the ETF offers income and stability at minimal cost.
I hold the Vanguard Total Bond Market ETF across all three portfolios, adjusting allocations based on each portfolio's objectives. While bond returns have faced headwinds from rising rates, this ETF remains crucial for managing portfolio volatility and providing steady income.
9. Global fixed income
Complementing the domestic bond fund, the Vanguard Total International Bond ETF (BNDX 0.19%) provides exposure to investment-grade bonds from developed and emerging markets outside the United States. With currency hedging to minimize exchange rate risk, this fund currently yields 3% and sports a reasonable 0.07% expense ratio.
The Vanguard Total International Bond ETF enhances portfolio diversification by adding international fixed income exposure. I hold it across all portfolios to reduce concentration risk and potentially benefit from different interest rate cycles globally.
Build your own ETF portfolio
These nine ETFs work together to create diversified exposure across asset classes, geographies, and market capitalizations. The average expense ratio across all holdings comes to just 0.08% -- a fraction of what most mutual funds charge.
Remember, the best portfolio is one you'll stick with through market cycles. Whether you prefer the simplicity of a two-fund portfolio or the granularity of my nine-fund approach, Vanguard's low-cost ETFs provide the building blocks for long-term investment success.
