For many investors, a crucial aspect of the exchange-traded fund (ETF) is its user-friendly nature. After all, why select a complex investment vehicle that requires careful, active management when you can entrust your assets to the manager of an ETF that builds in rebalancing and other maintenance for you? This way of thinking, as well as the low costs and steady returns generally associated with ETFs as a group of investment opportunities, have prompted massive growth in the industry. Indeed, in just a few years, ETFs have ballooned into a multi-trillion dollar market. There are hundreds of different funds available under the ETF umbrella, including both the very broad and the incredibly specific.
In the process of the ETF industry's incredible growth, an industry that was once designed in large part to keep investing simple has paradoxically become much more complicated. Even if ETFs offer an easier way to manage investments than some of their alternatives, there are now so many different ETF options available that an investor could likely spend just as much time trying to decide which funds to focus on. Fortunately, it does remain possible to keep it simple when it comes to ETFs. A recent report by Motley Fool suggests two ETFs in particular that can provide broad diversification. With a focus on building retirement wealth, these two funds prove that it's still possible to utilize a small number of ETFs to access a strongly diversified basket of stocks. (See also: 7 Best ETF Trading Strategies for Beginners.)
The first fund detailed in the report is the Vanguard Total Stock Market ETF. Perhaps unsurprisingly, VTI is modeled after low-cost, diversified S&P 500 index funds. These funds commonly provide investors with access to hundreds of the largest publicly traded companies across the U.S. It's clear why these funds remain highly popular – they tend to outperform nearly four out of five actively managed funds.
VTI moves a step beyond the basic index strategy, however. It also includes mid- and small-cap stocks in addition to large-cap names. In turn, this provides even richer diversification for the fund, further reducing the risk to the investor. It incorporates an important growth element as well, which could lead to even greater gains over the long term. The reason for this is that smaller companies tend to outperform their larger competitors over time. With more than 3,600 stocks representing companies of many different sizes and sectors, the Vanguard Total Stock Market ETF could even provide substantial diversification for an investor on its own. (For more, see: A Vanguard ETF Joins the $100B Club.)
The other fund indicated in the report is the Vanguard Total International Stock ETF. While VTI provides excellent diversification, it does so only within the context of U.S. companies. What VXUS adds to the mix is a similarly broad base of international companies. Indeed, VXUS offers even more companies in its basket: there are about 6,000 non-U.S. stocks represented in VXUS. Of those stocks, 80% are from developed markets like the U.K. and Japan, while 20% of them are from emerging markets like India and China.
What VXUS offers that VTI doesn't is access to major non-U.S. economies around the world. Some of these economies are growing at faster rates than the economy of the U.S., providing investors with easy access to exceptional performance. Furthermore, a portfolio including both U.S. and international companies will typically enjoy a lower overall risk profile because it is more highly diversified.
One excellent aspect of both of these ETFs is their low expense ratio. In fact, VXUS has fees of just 0.11% or so, which is less than about 90% of similar international funds.
There is no such thing as a guaranteed investment, but VTI and VXUS offer investors access to close to 10,000 different names in just two ETFs. That level of diversification is exceptional. (For additional reading, check out: Building an All-ETF Portfolio.)