By Matt Hougan
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
. 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
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
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.
click to enlarge
chart courtesy of
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 (
) 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
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 (
), the United States Commodity Index Fund (
) and the GreenHaven Continuous Commodity ETF (
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 (
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
But the core point remains: Institutionally diversified
portfolios are now cheap … very cheap.
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