What low-fee & liquid exchange-traded index funds / ETFs should I consider holding in a retirement portfolio?

Question

I'm still (one year later) going through an exercise to restructure my retirement portfolio.

To date, I've been using a mix of exchange-traded index funds. Some trade on the TSX, and others trade in the U.S. However, my choices have been somewhat ad-hoc, and one of my New Year's resolutions (again!) is to follow a more disciplined asset allocation with regular scheduled rebalancing.

Some index ETFs that I like already and am considering for inclusion are:

• iShares CDN MSCI EAFE 100% Hedged to CAD Dollars Index Fund (XIN on TSX)
• Vanguard Emerging Markets ETF (VWO)

What other specific ETFs should I consider? I'm interested in the cheapest funds (in terms of low management fees etc.) as well as the most liquid funds (in terms of size/volume.)

I know Vanguard has more great ETFs, but are there others listed in the U.S. worth considering that might have more attractive characteristics? Which do you like, and why?

Note: I am in Canada. Plain old U.S. mutual funds that aren't exchange-traded aren't available to me.

Answer 1

Here's a dump from what I use. Some are a bit more expensive than those that you posted.

The second column is the expense ratio.

The third column is the category I've assigned in my spreadsheet -- it's how I manage my rebalancing among different classes. "US-LC" is large cap, MC is mid cap, SC is small cap. "Intl-Dev" is international stocks from developed economies, "Emer" is emerging economies.

These have some overlap. I don't have a specific way to handle this, I just keep an eye on the overall picture. (E.g. I don't overdo it on, say, BRIC + Brazil or SPY + S&P500 Growth.)

The main reason for each selection is that they provide exposure to a certain batch of securities that I was looking for. In each type, I was also aiming for cheap and/or liquid like you.

If there are substitutes I should be looking at for any of these that are cheaper and/or more liquid, a comment would be great.

High Volume:

DIA 0.17 - Stocks-US-LC - Dow Industrials
SPY 0.09 - Stocks-US-LC - S&P 500
GLD 0.40 - Gold - Gold Trust
EFA 0.35 - Stocks-Intl-Dev - MCSI EAFE Index
EWZ 0.61 - Stocks-Intl-Emer - MCSI Brazil Index
LQD 0.15 - Bond-AAA - iBoxx Investment Grade
HYG 0.50 - Bond-Junk - iBoxx Hi Yield Bond

Mid Volume (<1mil shares/day):

EEB 0.63 - Stocks-Intl-Emer - Guggenheim BRIC
ICF 0.35 - REIT - Cohen & Steers Realty
IEV 0.60 - Stocks-Intl-Dev - S&P Europe 350
IVW 0.18 - Stocks-US-LC - S&P 500 Growth
IWR 0.20 - Stocks-US-MC - Russell Midcap
VBK 0.14 - Stocks-US-SC - Small Cap Growth
VBR 0.14 - Stocks-US-SC - Small Cap Value
VPL 0.16 - Stocks-Intl-Dev - Pacific

Low Volume (<50k shares/day):

GMF 0.59 - Stocks-Intl-Emer - S&P Emerging Asia Pacific
TLH 0.15 - Bonds-Gov - Lehman 10-20y USTreas
DWM 0.19 - Stocks-Intl-Dev - DEFA

These provide enough variety to cover the target allocation below. That allocation is just for retirement accounts; I don't consider any other savings when I rebalance against this allocation. When it's time to rebalance (i.e. a couple of times a year when I realize that I haven't done it in several months), I update quotes, look at the percentages assigned to each category, and if anything is off the target by more than 1% point I will buy/sell to adjust. (I.e. if US-LC is 23%, I sell enough to get back to 20%, then use the cash to buy more of something else that is under the target. But if US-MC is 7.2% I don't worry about it.) The 1% threshold prevents unnecessary trading costs; sometimes if everything is just over 1% off I'll let it slide.

I generally try to stay away from timing, but I do use some of that extra cash when there's a panic (after Jan-Feb '09 I had very little cash in the retirement accounts).

I don't have the source for this allocation any more, but it is the result of combining a half dozen or so sample allocations that I saw and tailoring it for my goals.

Stocks-US-LC     20.0%
Stocks-US-MC      8.0%
Stocks-US-SC     17.0%
Stocks-Intl-Dev  12.0%
Stocks-Intl-Emer  8.0%
Bonds-AAA         9.0%
Bonds-Gov         7.0%
Bonds-Junk        4.0%
REIT              5.0%
Energy            0.5%
Gold              4.5%
Cash              5.0%

Answer 2

I use the following allocation in my retirement portfolio:

• VXF - Vanguard Extended Market : 60%
• VEA - Vanguard Europe Pacific : 15%
• VWO - Vanguard Emerging Markets : 15%

I prefer these because:

1. John Bogle, Burt Malkiel, and Fool.com recommend a diverse collection of passively managed index funds. I agree with their underlying rationale, and I can implement their strategy with these ETFs.
2. They have low expense ratios.

Expense Ratios

• VXF: 0.08%
• VEA: 0.11%
• VWO: 0.2%

Oh, and by their very definition, ETFs are very liquid.

EDIT: The remaining 10% is the speculative portion of my portfolio. Currently, I own shares in HAP (as a hedge against rising commodity prices) and TIP (as a hedge against hyperinflation).

Answer 3

@bstpierre gave you an example of a portfolio similar to IFA's 70 portfolio. Please, look other variants of example portfolios there and investigate which would suit to you. Although the example portfolios are not ETF-based, required by the op, you can rather easily check corresponding components with this tool here. Before deciding your portfolio, fire up a spreadsheet (samples here) and do calculations and do not underestimate things below:

• safe withdrawal rates
• glide paths and more about glide paths here
• booring but a must: prospectuses generally here

Bogleheads have already answered this type of questions so why not look there? Less reinventing the wheel: google retirement portfolios site:bogleheads.org.

I am not making any recommendations like other replies because financial recommendations devalue. I hope I steered you to the right track, use less time to pick individual funds or stocks and use more time to do your research.

Answer 4

If liquidity and cost are your primary objectives, Vanguard is indeed a good bet. They are the walmart of finance and the absolute best at minimizing fees and other expenses.

Your main portfolio holding should be VTI, the total stock market fund. Highly liquid and has the lowest fees out there at 0.05%. You can augment this with a world-minus-US fund if you want. No need to buy sector or specific geography funds when you can get the whole market for less.

Add some bond funds and alternative investments (but not too much) if you want to be fully diversified.