5 ETFs You Need in Your Portfolio

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VanguardBuilding a well-balanced diversified portfolio can seem like an impossible task. There are thousands of potential investments, and you could spend every spare minute combing through financial statements before you even buy a single share.

Or you could take a shortcut and buy ETFs.

Though not a magic investing bullet, exchange-traded funds give investors a low-effort tool to build a diversified portfolio without having to make a career of researching huge numbers of stocks.

Why ETFs Are the Way to Go

Like mutual funds, ETFs contain dozens or even hundreds of different investments all within one simple package. However, ETFs have the built-in convenience of individual stocks: You can trade ETF shares whenever the stock market is open, and buying and selling shares is as easy as using your brokerage account.

Moreover, because most ETFs use easy-to-understand investing strategies that track indexes, you won't get ripped off by high management fees and other costs. And with many brokers offering commission-free ETFs, it's never been easier to get started.

Five ETFs That Cover All the Angles

The ETF industry has grown very quickly in recent years, which means now you can choose from hundreds of different ETFs covering nearly every type of investment you can think of. But to put together a first-class portfolio, you don't need exotic funds. Instead, pick ETFs that match up with a basic asset allocation strategy -- and then sit back and let them do the heavy lifting.

Here are five ETFs that will make your investing a lot easier:

1. Start with U.S. stocks: Vanguard Total Stock Market (VTI)

Owning U.S. stocks is a must for investors seeking long-term growth, even with a sluggish economy. Despite challenging business prospects in this country, U.S. companies have plenty of growth opportunities abroad, and those opportunities will reward shareholders.

Vanguard Total Stock gives you stocks of all sizes, from the biggest, most well-known companies to tiny ones you've probably never heard of. Although you can use separate ETFs if you want -- SPDR Diamonds (DIA), for example, tracks the Dow Jones Industrial Average (INDEX: ^DJI), while iShares Russell 2000 (IWM) covers the small end of the spectrum -- the Vanguard ETF combines them into one package.

2. Add some international flavor: Vanguard Total International Stock (VXUS)

At the same time, you don't want to own only U.S. stocks. International investments also play a key role in long-term returns. Again, you can get separate funds to cover different markets -- iShares MSCI EAFE (EFA) owns shares of companies in developed countries, while Vanguard MSCI Emerging Markets (VWO) focuses on fast-growing emerging economies like Brazil and China. But Vanguard Total International combines emerging and developed markets into a single investment.

3. Build in some bond exposure: iShares Barclays Aggregate Bond (AGG)

Stocks are great, but as you've seen over the past month, you can't count on stocks always to provide the growth you want. Owning some bonds in your portfolio can help offset losses from stocks during tough markets.

The iShares ETF combines Treasury, government agency, and corporate-issued bonds in one package. By building the right balance between the safety of Treasuries and the higher yields on corporate debt, the iShares ETF can do a good job of being a strong fixed-income performer.

4. Remember real estate: SPDR Dow Jones REIT (RWR)

For decades, income investors focused solely on bonds. But now, investors have discovered the stable income and growth potential that comes from real estate investments. And with the bargains you can find in real estate, it's worth taking a look at this space.

The SPDR ETF comprises shares of real estate investment trusts that own everything from commercial real estate and apartment buildings to shopping malls and storage facilities. Yields aren't sky-high right now, but they're better than you'll find from many bond funds.

5. Purchase a pinch of commodities: United States Commodity Fund (USCI)

With stocks jumping up and down violently in recent years, many investors have looked to commodities as an alternative. The problem with many commodity ETFs, though, is that they ignore fundamental flaws in commodity futures markets that can cause huge losses for investors.

The U.S. Commodity Fund, however, is designed specifically to take advantage of the same market flaws that have trapped some of its peers. By choosing a mix of commodities with the best prospects for future growth, the fund has outperformed its competitors in its first year of operation. If you think that gold and other commodities deserve at least a small place in your investments, having a commodity ETF among stock and bond ETFs makes plenty of sense.

Motley Fool contributor Dan Caplinger loves the simplicity of ETFs. You can follow him on Twitter here. He owns shares of iShares MSCI EAFE and Russell 2000 ETFs, as well as Vanguard MSCI Emerging Markets. the stocks mentioned in this article. The Motley Fool owns shares of Vanguard MSCI Emerging Markets ETF. Motley Fool newsletter services have recommended shorting iShares Russell 2000 Index.


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