The Cheapest ETF Portfolio

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With Schwab's recent decision to cut expense ratio on its ETFs, my "World's Cheapest ETF Portfolio" now has a blended expense ratio of less than 10 basis points a year.

Far less, in fact:0.0865 percent.

For the past five years, I've been tracking what I call "The World's Cheapest ETF Portfolio." It's a broadly diversified ETF portfolio holding U.S. stocks, international stocks, bonds, REITs and commodities. It's designed for an aggressive investor. The construction process is simple:Take the lowest-cost ETF in each asset class, with no additional screens.

When I first started tracking this portfolio, in 2007, the blended expense ratio was 0.16 percent per year . I thought that was amazing. But thanks to a burgeoning price war and the aggressive pricing of new ETF entrants like Schwab, the blended expense ratio, as I said, has dropped to just 0.0865 percent.

Read that one more time:0.0865 percent.

For that, you can get a portfolio with institutional-caliber diversification. You get exposure to 3,549 stocks in more than 40 different countries, 853 bonds and 19 different commodity contracts. You get REITs, emerging markets, oil, grains and gold.

You get a portfolio that will outperform the vast majority of investors over the long haul. And you get it for a pittance.

To put the low fee in perspective:According to the Investment Company Institute, the typical equity mutual fund charged 1.43 percent in fees last year. The total blended fee on my portfolio for the next 16.5 years is the same price you'd pay for the typical active equity mutual fund for the next 12 months. It's hard to believe, but it's true.

 

IndexUniverse:The World's Lowest Cost ETF Portfolio

Asset Class

Weight

Fund

Ticker

ER

U.S. Stocks

40%

Focus Morningstar US Market Index ETF
Schwab U.S. Broad Equity

FMU
SCHB

0.05%
0.04%

Developed
Markets Stocks

30%

Vanguard MSCI EAFE ETF
Schwab International Equity

VEA
SCHF

0.12%
0.09%

Emerging Markets

5%

Vanguard MSCI Emerging Markets
Schwab Emerging Markets Equity

VWO
SCHE

0.20%
0.15%

Fixed Income

15%

Vanguard Total Bond Market
Schwab U.S. Aggregate Bond

BND

SCHZ

0.12%
0.05%

REITs

5%

Vanguard REIT
Schwab U.S. REIT

VNQ
SCHH

0.12%
0.07%

Commodities

5%

UBS E-TRACS DJ-UBS Commodity TR ETN

DJP
DJCI

0.50%

Blended Expense Ratio 0.1120%
0.0865%

 

The beauty of this portfolio is that, unlike the last iteration—which included the ultra-low-cost but untradable funds from the now-defunct FocusShares—all the ETFs except one (DJCI) are liquid, robust and tradable at low spreads.

Schwab isn't going to close any of these funds; they tend to trade a penny or two wide, and they provide solid exposure. In other words, this is an eminently ownable portfolio.

And when you consider the fact that Schwab account holders can buy and rebalance these ETFs with no commissions, well, it's just beautiful.

How should you change this portfolio? For starters, obviously all of the weights depend on your personal situation.

Beyond that, you might want to swap out DJCI for something more tradable. I also prefer commodity ETPs with a more optimized approach to rolling their contracts.

On the ETF side, I'm a big fan of the PowerShares DB Commodity Index Tracking Fund (DBC), the United States Commodity Index Fund (USCI) and the GreenHaven Continuous Commodity ETF (GCC).

For taxable accounts, you're better off with an ETN. The selection of liquid, optimized commodity ETNs are limited; I do like the UBS E-Tracs CMCI Total Return ETN (UCI).

What else could you add to this portfolio?

International bonds would be a good idea, and the low-cost choices include the iShares S'P/Citigroup International Treasury Bond Fund (IGOV), with an expense ratio of 0.35 percent, and the WisdomTree Emerging Markets Local Debt Fund (ELD), which has an expense ratio of 0.55 percent.

I could go on:liquid alternatives; dividend stocks? The choices are many.

But the core point remains:Institutionally diversified portfolios are now cheap … very cheap.

 

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