Here's a simple ETF portfolio using just 4 ETFs offering ultra-low fees; they offer strong diversification and flexibility that would be appropriate for many retirees, notes David Dierking, editor of TheStreet's ETF Focus.

With more than 2000 different ETFs to choose from currently, retirees can position their portfolio in almost any way they want by targeting or overweighting just about any region, sector, theme or strategy they can imagine. One thing the ETF industry does perhaps the best is exactly the opposite of variety – simplicity.

If you want a widely diversified portfolio that hits on all the major asset classes, ETFs can do it. Better yet, you can have this kind of core portfolio for a cost of next to nothing. According to ETF Action,  there are currently more than 70 different ETFs that charge 0.05% or less annually.

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From those 70+ ETFs, you want to make sure you're getting the proper diversification. If you build simply on cost and go with the cheapest of this bunch, you're pretty much going to be left with a bunch of U.S. large-cap funds. That's not exactly building a well-rounded portfolio.

You could probably narrow things down to as little as two funds if you want to make it as simple as possible, but I think four will do the trick.

Granted, even with a quartet of highly diversified funds, you're still going to find some minor holes and nitpicks, but that's the beauty of the ETF marketplace. You can always augment your core positions to tilt your portfolio in any which way you choose.

If you were looking to build a simple and diversified portfolio that would be suitable for most retirees, I'd consider using the following four ETFs.

Vanguard Total Stock Market ETF (VTI)

This ETF would be your core U.S. stock position. It holds positions in nearly 4,000 different stocks across the large-cap, mid-cap and small-cap spectrum.

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It is a market cap-weighted index, however, so you've got heavy allocations to all the big mega-cap names, including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOGL). As a result, you've got about 89% of assets falling into the large-cap category.

Large-caps have been the best-performing U.S. equity market group for years now, so it would be understandable if you wanted to tilt your portfolio a little heavier towards smaller companies. Plus, an 89% allocation to large-caps isn't really that much different than just holding an S&P 500 ETF instead.

If you want to stick with the Vanguard family, the Vanguard Mid-Cap ETF (VO), the Vanguard Small-Cap ETF (VB) or the Vanguard Russell 2000 ETF (VTWO) would be your best choices.

Vanguard Total International Stock ETF (VXUS)

International stocks haven't really done much to inspire investor confidence over the past several years. Since the beginning of 2008, an investment in the MSCI EAFE index or the MSCI Emerging Markets index would have earned 4% and 1%, respectively. During the same time, the S&P 500 has returned roughly 200%. It's no wonder why so many investors are overweight U.S. equities in their portfolios.

Still, foreign equities are an important asset class to have in your portfolio. History has shown that U.S. leadership and international leadership in the stock market alternate in roughly 10-year cycles.

So you could make the argument that we're due for a turnaround. Of course, with so many countries presenting so many different risk/return profiles (economically, politically, etc.), it makes sense to have as much diversification as possible. 

What makes VXUS attractive is that 25% of the portfolio is dedicated to emerging markets. That's a little higher than you find in many broad international stock ETFs, but emerging markets present perhaps the best risk/reward opportunity among the trio of U.S./developed/emerging markets.

Instability over in China and significant delta variant impacts are making emerging markets especially risky in the short-term, but this is still an ideal long-term holding.

You could make the argument that emerging markets exposure may be inappropriate for retirees that are likely focusing on principal protection at this point in their lives. I think that's a fair point, although I think emerging markets belong to some degree.

Keep in mind also that this will be part of a 4 ETF portfolio and depending on your personal allocation among the four, emerging markets will be a relatively small piece of the puzzle overall. Even if you dedicate 20% of your portfolio to international stocks, that would translate to a 5% allocation to emerging markets. Enough to give it a presence, but likely not enough to move the needle in a major way.

I'll also point out that the Vanguard Total World Stock ETF (VT) also exists, which is substantially similar to a 60/40 allocation to VTI/VXUS.

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If you're comfortable with a 60/40 U.S./international mix within the stock portion of your portfolio, I have no issue with using this as a replacement for VTI and VXUS. I tend to prefer using the two ETFs separately so it allows some flexibility in establishing my own allocations, but it's a personal choice.

iShares Core Total USD Bond Market ETF (IUSB)

I think many investors would probably default to the iShares U.S. Aggregate Bond ETF (AGG) here, but I prefer IUSB. The reasons are primarily related to the differences in portfolio composition between the two.

AGG tends to be more heavily skewed towards government and mortgage-backed securities. This ETF has about 64% of assets dedicated to these two groups combined compared to 54% for IUSB.

In addition, IUSB has roughly 8% of assets invested in junk bonds, whereas AGG has no exposure at all to this group. I think IUSB has a better degree of diversification overall and does a better job of capturing the overall U.S. bond market.

The one thing that's missing in both ETFs is international bond exposure (IUSB's main qualifying criteria is U.S. dollar-denominated bonds, so while there is modest exposure to non-U.S. issuers, there is a lack of pure international investment).

There's also the Vanguard Total World Bond ETF (BNDW) as an option. It has a 50/50 split between U.S. and international bonds, but like AGG, has almost zero junk bond exposure.

If you want your bond allocation to include both junk bonds and international exposure, you'll probably need to go with two ETFs instead of one. The Vanguard Total International Bond ETF (BNDX) could work with IUSB, but it invests strictly in investment-grade bonds, so a pairing with AGG would still omit junk bonds.

This gets a little trickier, but IUSB is still my single fixed income ETF of choice.


Most portfolio advisor-types would suggest a 5-10% allocation to real estate and I would tend to agree. Both VTI and VXUS each only have roughly a 3% allocation to real estate, so the current portfolio as constructed just isn't going to cut it. That's why I'd add in SCHH here to get the overall REIT allocation back into that range.

The Vanguard Real Estate ETF (VNQ) owns roughly half of the assets of the real estate ETF space, but I prefer SCHH because it's the cheapest ETF in this group (by a single basis point, but still) and it has a solid degree of both diversification and quality. It focus on some of the biggest and financially healthy REITs available and adds both mortgage and hybrid REITs to improve the mix.

How To Build A Portfolio Allocation

Here comes the trickier part – how to allocate to each of these four ETFs to find the right mix.

This will mostly depend on personal preference and circumstances. The "Rule of 100" used to guide how retirees should allocate their portfolios. This tenet said that you should subtract your age from 100 and that's how much you should invest in stocks. For example, a 70-year old should have 30% of their portfolio in equities according to this rule.

This sort of changed to the "Rule of 120" over the past decade or two with people citing longer lifespans as the reason. Let's split the difference and create the rule of "Rule of 110". In this example, let's use an overall 40/60 stock/bond allocation as our example keeping in mind that you can tweak it higher or lower if you want.

We talked already about a 5-10% allocation to real estate as our guideline. Let's go towards the higher end with 10% since retirees are probably going to want to focus on higher current income. A higher allocation to REITs allows for that.

That would leave the 60% fixed income allocation to IUSB and the remaining 30% to be split between VTI and VXUS. Most people tend to favor U.S. equities in their portfolio, but keeping at least some in international stocks is important. Let's put 20% in VTI and 10% in VXUS.


For retirees looking for the simplest, lowest cost portfolio appropriate for their golden years, this 4 ETF portfolio I laid out here could certainly do the trick. Its weighted expense ratio of around 0.07% ensures that almost all of your money stays in your pockets.

The allocations within this group should be fluid and should depend on your personal risk tolerances and goals. Risk seekers will probably have few qualms going well above the 40% equity target I mentioned, while others could go as much as all-in on bonds.

I encourage you to consider what is most comfortable for you and meets your individual goals before proceeding. And if you prefer to tilt your portfolio towards a specific asset, sector or theme, don't hesitate to look into adding another low-cost ETF or two to round things out.

The one drawback to this, of course, in the current market environment is yield. Or lack of it. If you're looking to live purely off of portfolio income, the current yield of around 2% from this portfolio probably isn't going to cut it.

The temptation might be to drift further out on the risk spectrum by looking at junk bonds, mortgage REITs, MLPs or other high yield asset classes. I'd urge investors to use extreme caution before venturing heavily into these types of assets will expose you to significant downside risk in case conditions turn south.

Look no further than the returns of these groups during the COVID bear market to see what can happen. It may be wiser to consider withdrawing a portion of your portfolio balance to augment what you can receive in dividend yield instead of increasing risk.

If you're looking for a nice core portfolio to build on for retirement, I think these 4 ETFs along with some of the alternatives mentioned will help most retirees hit their goals.

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