Four Index ETFs to Balance your Equity Portfolio

11/23/2017 5:00 am EST

Focus: ETFS

Richard Moroney

Editor, Dow Theory Forecasts

Investors seeking to diversify a stock portfolio with index funds have several choices depending on the portion of the market they wish to capture; below we profile four exchange-traded index funds, each of which serves a different purpose, explains Richard Moroney, editor of Dow Theory Forecasts.

Below we profile four exchange-traded index funds, each of which serves a different purpose.

With an impressive fund score of 95, Vanguard Mid-Cap Value (VOE)  holds nearly 210 stocks, with financials representing 22% of the portfolio and consumer discretionary 19%. The ETF ranks among the top 16% of its category for five- and 10-year performance.

Up 10.9% in 2017, the fund has outpaced its peer group by nearly three percentage points. A four-star fund according to Morningstar, Vanguard Mid-Cap Value has a modest annual expense ratio of 0.07%, versus the category average of 0.41%. Low expenses help minimize tracking error versus the underlying index. The fund is a member of our Growth and Conservative portfolios.

A core holding in both recommended fund portfolios, Vanguard S&P 500 (VOO)  is a cheap way to mimic the venerable index — the annual expense ratio is a tiny 0.04%. That equates to only $4 for every $10,000 invested. For comparison, the average S&P 500 Index fund charges 0.48%.


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With nearly $80 billion in assets, Vanguard S&P 500 is the fifth-largest ETF. It has gained 17.2% so far in 2017 and has an impressive five-year annualized return of 15.8%, compared to 14.2% for the average large-cap blend fund.

Vanguard Small-Cap Value (VBR) ranks among the top 25% of its peer group for three- , five- , and 10-year total returns. Boasting a fund score of 95, the ETF invests in more than 840 stocks. Its holdings have a median market capitalization of $3.7 billion, compared to $92.1 billion for the S&P 500.

Major sector weightings are financials (19% of assets) and industrials (18%). So far this year, the fund has risen 6.7%, versus 4.0% for its category. At 0.07%, the expense ratio is 82% below the category average. The ETF is a component of both recommended fund portfolios.

For bond investors seeking an all-weather holding, we recommend Vanguard Total Bond Market (BND).  The fund invests in nearly 8,250 securities, including government, corporate, foreign, and mortgage-backed bonds. The ETF, yielding 2.5%, has gained 3.3% this year, while the 10-year annualized return is 4%. The expense ratio is only 0.05%.

With the Federal Reserve signaling the potential for rate hikes, investors need to know that bond prices tend to move in the opposite direction of rates. Still, the fund offers dependable income and a way to preserve wealth — attractive qualities for conservative investors. Since its 2007 inception, the fund has had one down year, a modest 2.1% decline in 2013.

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