How to Invest Using Only ETFs

I noted in a previous post how someone could invest using only index funds. Now here are some thoughts on how to invest using only ETFs:

• Start with Vanguard Total Stock Market ETF (VTI), which charges just 0.07% annually in expenses. The fund tracks the MSCI Broad Market Index -- which means it essentially gives you the entire U.S. stock market. Put three-quarters of your stock money in this ETF.

• For the final quarter of your stock money, Vanguard again has the best ETF: Vanguard FTSE All-World ex-US ETF (VEU). For 0.25% annually, this ETF gives you the entire world except the U.S.

• It's a similar story with bonds. Vanguard Total Bond Market ETF (BND) is the low-cost option, with annual expenses of 0.11%. If you're investing in a taxable account, however, substitute Vanguard Intermediate-Term Tax Exempt (VWITX), a regular mutual fund that invests in high-quality, tax-free bonds.

• All that's left is to decide what proportion of your money you want in stock ETFs, and how much in bond ETFs. Keep 90% or more of your money in the two stock ETFs until you're about six years from retirement. Then, gradually sell some stock ETFs until you have about 40% in bonds during retirement. For your children's college savings, put 90% or more in the stock ETFs until your child is about ten years from college. Then, gradually sell your stock ETFs and then your bond ETFs until you're entirely in cash by the time your child's junior year of college begins.

I've said before that I prefer index funds over ETFs because I buy additional shares every month and after awhile those ETF transaction fees can really add up. That said, for those of you who do buy ETFs and want a simple yet effective way to invest, this seems to be it!

For more on this topic, see these links:

• Which is Better: Index Funds or ETFs?

• Why I Like Index Funds

• The Basics of ETFs

Comments

[Lazy Man and Money]

Excellent! I didn't know about the VEU. I had been using EFA.

I like to add a little VB (Vanguard smallcap) into the mix as I think that's a little under-weighted by VTI. I could be wrong, but I like the small company bet in general.

Transaction costs can be minimized with Zecco. I invest my Roth IRA once a year with TDAmeritrade, so there aren't a lot of transactions there - just a one time buy.

[A Tentative Personal Finance Blog]

I'm still not sold on buying ETFs yet. Sure they're easy to get in and out of because they trade like stocks, but the fees can really eat your returns. I've looked into Zecco, like the previous commentor mentioned. I just can't see how they can keep that business model of no fees for a lot longer. Maybe I'm wrong though.

[Dave]

ZECCO!

If you are still using a "cheap" discount broker, you are going broker.

[Bill]

For people with rollover IRA, ETF's have one are where they have a HUGE advantage. If you cannot dollar cost average into the IRA, investings rollover money in low-cost ETF's is a no brainer.