How to Build the Ultimate Everything ETF Portfolio
Recent market volatility has tested the nerves of even the most seasoned investors. Fluctuations in major indices, driven by persistent inflation concerns, rising interest rates, and geopolitical uncertainties, have created a challenging environment. Within this turbulence, the contrasting performance of different asset classes, including U.S. stocks, international stocks, and bonds, highlights a fundamental principle of investing: diversification.
Diversification is a fundamental principle of investment strategy that involves spreading your investments across different asset classes to minimize risk. By diversifying your portfolio with ETFs, you can protect yourself from significant losses if a single asset class or sector underperforms. This approach ensures that your overall portfolio remains resilient in the face of market volatility.
Riding the U.S. Market Rollercoaster
The iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT) provides broad exposure to the U.S. equity market, tracking the S&P Total Market Index. ITOT has experienced a year-to-date (YTD) performance of -6.48% as of this writing, reflecting the broader challenges faced by U.S. stocks. This downturn is further illustrated by its shorter-term performance, with a 5-day return of -4.34%, a 1-month return of -10.20%. However, looking at the 1-year performance provides a slightly more optimistic perspective, showing a return of +5.89%.
These figures highlight the stock market's inherent volatility, particularly in the current environment. Factors such as interest rate sensitivity and sector-specific performance, especially within the technology sector, have contributed to ITOT's recent movements.
The iShares Core S&P ETF (ITOT) offers broad diversification within the U.S. market, holding 2522 different stocks. Its top holdings are composed primarily of prominent technology companies, mirroring the substantial influence of this sector. The ETF's sector breakdown is heavily weighted towards technology, financials, healthcare, and consumer discretionary, reflecting the overall composition of the U.S. market.
With a remarkably low expense ratio of 0.03% and assets under management totaling $64.64 billion, ITOT presents a potential strategic entry point for investors anticipating a stock market rebound.
International Exposure Offers a Buffer
In contrast to the U.S. market's struggles, the Schwab International Equity ETF (NYSEARCA: SCHF) has demonstrated some resilience. This ETF, which tracks the FTSE Developed ex-US Index, provides exposure to international stocks in developed markets outside the United States. As of this writing, SCHF boasts a positive YTD performance of +7.24%, outperforming its U.S. counterpart.
This outperformance is further supported by its 1-year return of +2.24%. Several factors may contribute to SCHF's relative strength, including favorable currency movements, different geographic and sector exposures, and potentially less direct impact from U.S. monetary policy decisions.
SCHF, with an expense ratio of 0.06% and AUM of $43.50 billion, holds a diversified portfolio of 1509 stocks across developed international markets. The ETF underwent a 2-for-1 stock split on October 11, 2024, and currently has a beta of 0.89, indicating it is less volatile than the overall market.
Anchoring your Portfolio
The Vanguard Total Bond Market ETF (NASDAQ: BND) plays a crucial role in a diversified portfolio by providing exposure to the U.S. investment-grade bond market. Tracking the Bloomberg U.S. Aggregate Float Adjusted Index, BND offers a degree of stability, which is particularly valuable during periods of stock market volatility. BND has a YTD performance of +1.39%, a modest but positive return in a challenging environment for bonds, given the backdrop of rising interest rates. The fund's focus on high-quality, investment-grade bonds contributes to its relative stability.
The BND ETF, which is one of the largest bond ETFs available, has an expense ratio of 0.03% and $127.21 billion in assets under management. The fund comprises a massive portfolio of 17,963 bonds, predominantly U.S. Treasury Notes and other government-related securities, ensuring high credit quality.
With an annual dividend of $2.67 and a most recent payment of $0.2195 per share on March 5, 2025 (for investors holding shares before the ex-dividend date of March 3, 2025), the fund offers a 3.65% dividend yield.
Strength in Numbers: The Power of Diversification
The contrasting performance of ITOT, SCHF, and BND in recent months vividly illustrates the core principle of diversification. While U.S. stocks (ITOT) have faced downward pressure, international stocks (SCHF) have shown resilience, and bonds (BND) have provided a degree of stability.
This demonstrates how different asset classes can react differently to the same market conditions. The specific allocation to each of these ETFs within a portfolio depends on an individual investor's risk tolerance and financial goals. It's also crucial to rebalance the portfolio periodically, adjusting the holdings to maintain the desired asset allocation.
A Long-Term Perspective
Investing is inherently a long-term endeavor. While short-term market fluctuations are inevitable, a well-diversified portfolio, such as one constructed with ETFs like ITOT, SCHF, and BND, can provide a solid foundation for navigating market volatility and pursuing long-term financial goals. The key is to maintain a disciplined approach, focus on the long-term horizon, and understand that diversification is a powerful tool for managing risk.
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