Building a Complete Portfolio With Just 3 ETFs

If your idea of building a portfolio involves studying hundreds or thousands of different stocks and determining which are best for you, there's an easier way. With exchange-traded funds (ETFs), you have access to enough assets across different sectors to create a diversified portfolio. In addition to diversification, ETFs offer relative liquidity, low expense ratios, tax efficiency, transparency, and flexibility.

In fact, ETFs are so effective that you can build a well-balanced portfolio with just three of them. Here's how.

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Simplify with your core three

Your three "core" ETFs offer a streamlined approach to investing without sacrificing growth. The beauty of this streamlined approach is that it allows you to capture both U.S. and global market returns while minimizing overlap. A classic three-ETF portfolio typically includes:

1. A U.S. total stock market ETF
2. An international stock ETF
3. A total bond market ETF

This powerful combination provides exposure to thousands of securities across multiple asset classes and countries.

Strategic allocation

Strategic allocation refers to dividing your investment dollars between riskier assets (such as stocks) and defensive assets (such as high-quality bonds and cash). The goal of asset allocation is to combine complementary assets to achieve long-term growth while helping you withstand market downturns.

There is no one-size-fits-all allocation strategy, but there is a rule of thumb that some investors live by -- 100 minus your age. It's as easy as subtracting your age from 100 and using that number to determine the percentage of risky and defensive assets you'll carry.

For instance, if you're 45 years old, you'd allocate 55% to stocks (split between U.S. and international stocks) and the remaining 45% to bonds and cash. If you're 65, the allocation would be 35% to stocks and 65% to bonds and cash.

While it's easy to imagine strategically picking and choosing individual stocks and bonds to fit your desired allocation, it may be a little harder to imagine how it's done when you're building your portfolio entirely from ETFs. However, it's easily accomplished by focusing on ETFs for each asset class you want to hold. For example:

U.S. equity ETFs (stocks)

Vanguard Total Stock Market ETF (NYSEMKT: VTI): Covers the entire U.S. stock market, including small-, mid-, and large-cap stocks.

International equity ETFs

Vanguard FTSE All-World ex-US ETF (NYSEMKT: VEU): Provides broad exposure to stocks in developed and emerging markets outside the U.S.

Bond ETFs

Vanguard Total Bond Market ETF (NASDAQ: BND): Aims to provide broad exposure to the U.S. investment-grade bond market. This includes government, corporate, and municipal bonds, as well as mortgage-backed securities.

The ETFs mentioned here are a suggestion, meant to illustrate the ease of allocating assets for an ETF-only portfolio. They all happen to be Vanguard products, but there are many other strong options available.

If ETFs are new to you and this all feels a bit overwhelming, that's natural. Now may be a good time to meet with a financial advisor who can walk you through your options and potential outcomes.

The attractive thing about ETFs in general is the level of exposure they give you to companies and sectors you may never have considered. And with three ETFs, you can be sure to cover your bases.

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