Building a portfolio can become complicated and time-consuming for many investors. Rather than constantly monitoring and rebalancing individual stocks, investors can opt for a simple 2-ETF portfolio that fits many long-term investors’ goals.
Doing so not only avoids the need for individual stock hunting and rebalancing but also allows an investment to be spread across thousands of businesses.
The only question remains what investments would I choose for that 2-ETF portfolio?
The two funds I’m looking at right now are Vanguard FTSE Canada All Cap Index ETF (TSX: VCN) and iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW).
Each of those funds has a clear job in a portfolio. The Vanguard fund provides exposure to the Canadian market, while the iShares fund gives international coverage without the need to find holdings from multiple regions.
It also makes the portfolio very easy to understand.
Here’s why that combination appeals to me and how I’d put it to work.
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Build the Canadian foundation
The Vanguard fund tracks a broad Canadian equity index. That means it provides exposure to large, midsize and smaller companies across multiple sectors of the economy.
That includes exposure to the financial, energy, materials, industrial, telecoms, utilities and tech sectors, to name just a few.
The fund also carries a small management expense ratio (MER) of just 0.05%. That helps to keep the cost of that exposure down.
Perhaps the biggest advantage is that buying the fund removes the need to choose which Canadian bank will perform best or which energy producer deserves a place in the portfolio.
Instead, investors own a basket of companies with weightings that reflect the index.
Within this 2-ETF portfolio, I would allocate 30% of my funds to VCN. It gives Canadian businesses a solid place in the portfolio and leaves most of the money for opportunities elsewhere.
Move your portfolio beyond Canada
For the remaining 70% of the funds in this 2-ETF portfolio, I would provide exposure to U.S. stocks, international developed markets and emerging markets.
XAW is great at meeting this goal because the fund is a fund-of-funds. It gives investors access to sectors and industries that have a smaller presence in Canada. That diversifies the portfolio beyond Canada.
The fund carries a MER of 0.22%. And while there are risks, I like the convenience of holding overseas exposure in a single fund.
It’s also much easier than picking individual U.S., European and emerging market ETFs.
How much I’d invest in this 2-ETF portfolio
For a beginner portfolio with $10,000 available to invest, I would drop $3,000 in VCN and the remaining $7,000 into XAW.
Both funds also pay distributions that investors can reinvest to support long-term compounding.
The iShares fund pays out a semi-annual distribution and carries a yield of 1.2%. Given a $7,000 position, that works out to a little more than one new share from reinvestments over a year. That’s not going to push the needle too much, but it can help over longer periods.
The Vanguard fund offers a higher 2.1% yield and pays distributions quarterly. For that smaller initial $3,000 investment, that would generate just under a whole new share over a year from reinvestments.
Investors without $10,000 to start this 2-ETF portfolio could opt for smaller monthly contributions to build that position out over a longer period. Investors contributing $500 monthly could split that into $150 in VCN and $350 in XAW.
