For some, investing is a fun and engaging activity, while others feel uneasy just thinking about it. If you belong to the latter group or simply want to streamline your investment process, it's worth considering these two Vanguard exchange-traded funds (ETFs). Whether you have $2,000 or $20,000, you can build a diverse, low-cost portfolio with just two transactions, making it incredibly easy to manage. Here’s how you can begin.
What makes exchange-traded funds appealing?
Let’s start by looking at what ETFs are. These investment vehicles pool money from many investors, similar to mutual funds, but they can be bought and sold throughout the trading day like individual stocks. This means ETFs offer both convenience and liquidity. In contrast, mutual funds are only traded at the market’s close. By choosing broad index ETFs—like the two Vanguard funds discussed here—you also gain exposure to a wide range of investments.
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Another advantage is that ETFs generally come with much lower fees than mutual funds. They are also far more affordable than hiring a financial advisor to manage your assets. Vanguard is especially recognized for its minimal expense ratios, and both of these ETFs charge just 0.03%—which is almost negligible by industry standards.
Build a simple portfolio with two Vanguard ETFs
Most portfolios are divided into two main asset classes: stocks and bonds. Combining both is often referred to as a balanced strategy. While there are mutual funds that offer this approach, you can achieve the same result more cost-effectively by pairing the Vanguard S&P 500 ETF ( VOO 0.60%) with the Vanguard Intermediate-Term Bond ETF ( BIV ).
The Vanguard S&P 500 ETF is straightforward: it mirrors the performance of the S&P 500 ( ^GSPC 0.59%), which is widely regarded as the leading indicator of the U.S. stock market. The index is composed of major U.S. companies selected by a committee to represent the overall economy, and the stocks are weighted by market capitalization. While you could try to pick individual stocks, legendary investor Warren Buffett has long recommended simply investing in the S&P 500 for most people.
The Vanguard Intermediate-Term Bond ETF may not be as familiar. This fund invests in high-quality bonds that typically mature in five to ten years. It tracks the Bloomberg U.S. 5-10 Year Government/Credit Float Adjusted Index, but the key point is that it provides a diversified mix of intermediate-term bonds. This segment often offers a good balance between yield and risk—higher returns than short-term bonds, but without the increased risk of long-term bonds.
Your next step is to decide how much of your portfolio you want in stocks versus bonds. A common guideline is a 60% allocation to stocks and 40% to bonds. If you’re younger or more comfortable with risk, you might choose 80/20. If you prefer to be cautious or are nearing retirement, 40/60 could be more suitable. Choose the mix that matches your comfort level, and that will be your target allocation until you decide to adjust it.
For example, if you start with $2,000 and opt for a 60/40 split, you’d invest about $1,200 in the Vanguard S&P 500 ETF and $800 in the Vanguard Intermediate-Term Bond ETF. You can then leave your portfolio alone for about a year. When you check back, the proportions may have shifted. Simply rebalance by selling some of one ETF and buying the other to restore your original allocation. Repeat this process annually, and your portfolio will stay on track.
Other factors to keep in mind
At its core, a portfolio made up of the Vanguard S&P 500 ETF and the Vanguard Intermediate-Term Bond ETF is all you need—and maintaining it only requires two trades per year. The main thing that will change over time is how you divide your money between the two ETFs. As mentioned earlier, your risk tolerance will influence your allocation, and this is likely to shift as you get older, with a greater emphasis on bonds later in life.
In summary, after setting up your two-ETF Vanguard portfolio, the main thing you’ll need to revisit is your willingness to take on risk. However, this is something you’ll likely only need to reconsider every few years.
