After having covered the key theoretical aspects to better understand ETFs in a previous article, let us now consider the more practical aspects of ETF investing.
A simple portfolio of ETFs
In his “Little Book of Common Sense Investing”, John Bogle suggests using a single fund such as a Total Stock Market Index Fund to hedge equity exposure. Investor-author Taylor Larimore also recommends avoiding overly complex investments because a simple portfolio has lower costs and less administrative work. This is good advice to start with and is a great approach for any beginner or anyone who wants to avoid a disaster on overly concentrated investments. However, in building a portfolio, there are pockets of expensive investments to avoid and a more granular approach may be necessary at times.
Depending on where you live, you should look for low-cost US or Irish ETFs (as outlined in the article on ETF characteristics). If you face several variants for the same ETF with similar fees, you should buy large ETFs that provide the lowest bid-ask spread and physical replication.
You should also consider your jurisdiction’s tax optimization plans along with your other investments. For example, you can select your domicile at http://www.justetf.com and add the necessary keyword to filter the ETFs eligible for tax deduction plans. Providers Lyxor and Amundi, for example, offer options around a total expense ratio of 0.15%. The only problems with these issuers are 1) the generally lower volume of these funds (compared to Vanguard and iShares), which results in a larger market impact, and 2) the swap-based replication, which means the ETF does not directly own the stock but gets exposure to the equity market through a derivative. You should avoid swap-based ETFs (synthetic replication) that do not own the underlying stock but a basket of unrelated assets combined with derivatives. This might be acceptable for short-term speculative trading or when only these ETFs are eligible for deduction plans, but you should avoid them over a long-term horizon.
Which ETFs to choose?
For illustrative purposes, here are some examples of ETF bricks for your portfolio. Don’t forget to take into consideration the price level and your overall positions before investing:
- As a core index fund, the Vanguard FTSE Developed World Index is an excellent choice, despite its very high weighting in US stocks. It tracks the largest developed market stocks from around the world. It is an ETF with over 1 billion in assets under management with a physical replication, is over 5 years old and is domiciled in Ireland. If your broker allows it, a US-domiciled ETF (such as Vanguard Total World Stock) would be preferable because of the high proportion of US stocks for which you can more easily reclaim withholding tax.
- For exposure to China (over 37% of ETF assets in 2021) and emerging markets, the iShares MSCI EM ETF (or Vanguard’s cheaper US-domiciled equivalent with the FTSE EM Index) is a possibility to consider. It invests in stocks focused on emerging markets and allows you to invest in about 1’400 stocks with low fees. It is a very important ETF with over 3 billion assets under management. Again, if your broker gives you the possibility, the Vanguard FTSE Emerging Markets ETF (domiciled in the US) allows you to invest in emerging markets with lower fees of 0.10%.
| Region | Name | Fee | Reference |
| Developed countries | Vanguard FTSE Developed World UCITS ETF Vanguard Total World Stock ETF | 0.12% 0.08% | ISIN: IE00BKX55T58 CUSIP: 922042742 |
| Developing countries (including China) | iShares MSCI EM UCITS ETF Vanguard FTSE Emerging Markets ETF | 0.18% 0.10% | ISIN: IE00B0M63177 CUSIP: 922042858 |
In addition to the two basic ETF examples above, you can add other ETFs for markets that would be more affordable. In early 2022, this would mean focusing on cheaper markets than the US for example. Be careful not to get lost with a proliferation of ETFs in your portfolio that could make you lose the big picture:
You can also add country-specific ETFs under http://www.justetf.com, but to start with, you should invest in two to three ETFs, at the risk of losing the big picture. Swiss, French and Belgian investors can use the above options from iShares and Vanguard (or with similar characteristics to those mentioned). All have high AUM, low costs and physical replication. They are also Irish-domiciled (or US-domiciled if acceptable), which offers a degree of security to European investors compared to Singaporean ETFs which have other risk/reward profiles (a US-domiciled ETF is most recommended if dividends are paid by US companies and if the TER is lower as with the Vanguard Total World Stock and Vanguard FTSE Emerging Markets ETFs). The illustrations above cover the developed world (with a heavy US weighting) as well as the developing world.
You can go further (while agreeing to invest more of your time) and invest in a diversified portfolio by adding some more attractive markets, i.e. with more attractive prices. This is an interesting option after you have gained some experience and if you feel that the world’s largest caps, US growth stocks are too highly valued. You will still benefit from most of the advantages of passive investing (diversification and low cost), even if you deviate, at least temporarily, from the global benchmark.
- For exposure to the Eurozone, you might consider the Vanguard European Stock Index Fund ETF, which is broader than the iShares Core EURO STOXX 50. The total expense ratio is 0.10% p.a. The fund replicates the performance of the underlying index by buying all components of the index (“full replication”).
- If you want exposure to the Swiss franc, you can add the iShares Core SPI ETF with a TER of 0.10% (CH0237935652), but unfortunately also with a very high weighting on three companies: Nestlé, Novartis and Roche.
- Another option is an ETF on the German market that seems to have solid fundamentals at an acceptable price (P/E of 14), if you want exposure to EUR and consider the EUROSTOXX 50 too expensive. In this case, a good vehicle would be for example the Germany All Cap UCITS ETF (VGER) – IE00BG143G97 domiciled in Ireland.
Guide Finances 