The Ultra-Low-Cost Global Investment Portfolio
As Index Fund pioneer Jack Bogle and other professional investors have pointed out for decades and investment research has shown, low costs and fees are paramount in maximizing real investment returns long-term. Why are costs so important, especially for the long-term investor?
Why costs matter in investing
Let’s do a simple comparison of two exemplary investment portfolios to show the impact of costs in the long-term.
|Portfolio 1||Portfolio 2|
|Total expense ratio||1.5% p.a.||0.1% p.a.|
|Annual expense amount:||$7,500||$500|
The portfolios show expenses of $500 vs. $7,500 annually, that’s a whopping $7,000 difference every year. If that does not shock you right away, take that $7,000 over 30 years reinvested at 6% p.a. and you arrive at a difference of more than $550,000, which is the cost-based outperformance of Portfolio 2, assuming equal returns.
You would need exceptional, consistently higher returns in the high-cost investment in order to just offset the cost disadvantage – good luck with that. Research has shown that you simply cannot expect that, so you give away a fortune over a lifetime of investing as your portfolio grows in size! Just one simple investment rule – sticking to a low cost asset allocation – may save you thousands of Dollars per year, which you can invest instead.
How to keep costs low
In a diversified investment portfolio, or in other words, a global asset allocation, keeping costs low can be tricky, as the universe of investable financial instruments expands daily. To make matters worse, if you want to include Real Estate and Commodities in addition to Equities and bonds in your allocation, costs can increase significantly.
However, thanks to the emergence of low-cost Index Funds and ETFs, building an ultra-low-cost global investment portfolio is now more than doable for the average investor.
So let’s check out a few allocations. I will not discuss the weights of the various asset classes and the selected ETFs in detail. For the purpose of this article, we just focus on low costs and diversification among asset classes.
The portfolios below clearly represent a diversified allocation for a long-term, capital-building investors. For retired investors aiming for capital preservation and lower volatility, a lower Equities-weight may be suitable.
1. “The World’s lowest cost portfolio”
This portfolio was published by Matt Hougan on etf.com in 2017. At a total expense ratio of just 0.05% p.a. you are already close to zero costs with this allocation.
|U.S. Equity||40%||iShares Core S&P Total|
U.S. Market ETF
|30%||SPDR S&P World ex-US ETF||GWL||0.04%|
|5%||SPDR Portfolio Emerging |
|Fixed Income||15%||Schwab U.S. Aggregate Bond||SCHZ||0.04%|
|REITs||5%||Schwab U.S. REIT ETF||SCHH||0.07%|
|Commodities||5%||GraniteShares Bloomberg |
Commodity Broad Strategy
No K-1 ETF
|Combined weighted fee||0.05%|
2. Lower costs by getting paid for ETF holdings
This portfolio builds on the approach shown above and was published in a recent article by Ryan Kirlin on alphaarchitect.com. It includes a US Equities ETF that currently pays you 0.05% p.a. just to hold it. Though this may be temporary only, it also shows where fees could be headed. Why not negative fees in an age of negative interest rates?
|U.S. Equity||40%||Salt Low truBeta US|
|30%||SPDR Portfolio Developed|
World ex-US ETF
|5%||SPDR Portfolio Emerging|
|Fixed Income||15%||Vanguard Total Bond |
|REITs||5%||Schwab U.S. REIT ETF||SCHH||0.07%|
Strategy No K-1 ETF
|Combined weighted Fee||0.0195%|
This portfolio drives fees even further down – almost close to zero with a weighted fee of 0.0195% p.a.
3. An ultra-low-cost option for Europeans
The low-cost portfolios above are quite US- and US-Dollar-focused in all asset classes. Furthermore, not all of these ETFs may be accessible to retail investors in Europe. Especially in the bonds & REITs-section, a more global approach may be suitable, although it comes with slightly higher costs. The selection below should be tradeable for most European investors through the online broker of their choice:
|U.S. Equity||20%||Invesco S&P 500 UCITS ETF USD||0.05%|
|20%||SPDR MSCI World UCITS ETF USD||0.12%|
|European Equity||30%||Invesco EURO STOXX 50 ETF EUR||0.05%|
|5%||iShares Core MSCI Emerging |
Markets IMI UCITS ETF USD
|Fixed Income||15%||SPDR Bloomberg Barclays Global|
Aggregate Bond EUR Hedged
|REITs||5%||Think Global Real Estate UCITS|
|Commodities||5%||ishares Diversified Commodity |
Swap UCITS ETF USD
|Combined weighted fee||0.095%|
At a combined total expense ratio of 0.095% this portfolio is considerably more expensive than portfolios 1 and 2 above, but it is still very low-cost and way cheaper than lots of the alternatives out there.
The good thing is, it will probably only get cheaper further down the road, with the zero-cost-ETF-portfolio not too far away anymore. Think of ETFs whatever you want (ETFs Pros & Cons may be a topic for another post), but at least the retail investor has a choice now, e.g. to invest in a globally diversified portfolio at below 0.1% fees p.a. Isn’t that great? – Compare that to the dark ages of the 20th century where as retail investor you may have had to pay up to 2.5% p.a. for your mutual fund selection, which very likely delivered nothing but underperformance for you and excess profits for Wall Street.
Disclaimer: Personal opinion, no investment advice.