The Ultimate ETF Portfolio – Low Fees, Low Taxes, High Returns

We’re always looking to build the perfect ETF portfolio and we think we’ve now come pretty close.

While the overall theme is similar to what we have talked about before, the portfolio has gone through a total makeover – and the end result may surprise you. Spoiler – there’s no room for Vanguard.

In this article, we’re going to share with you the exact portfolio that we’re building going forward.

It’s designed to be simple, low maintenance, low cost, low tax, and extremely transparent, so we know exactly what we’re investing in. Plus, it should be very profitable!

We’ll first look at why there’s no room for Vanguard, and then go through each ETF in turn, why they’re in the portfolio, and their historic returns. Let’s check it out…

All these ETFs are available on Interactive Investor. Anyone signing up through this link helps the website, so thanks in advance.

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No Vanguard

Probably the most surprising part of this ETF portfolio is the absence of any Vanguard ETF. In our mission to simplify the portfolio, drive down taxes and to ensure wide coverage across market cap size we have decided to omit Vanguard completely.

This is despite Vanguard having some of the lowest cost ETFs available. The main reasons we dropped Vanguard are as follows:

Reason #1 – No Synthetic ETFs

Many greedy countries around the world deduct a despicable tax from your dividends called Dividend Withholding Tax. For some countries – but not all – synthetic ETFs allow you to circumvent this tax, giving your returns an immediate boost.

Most importantly, synthetic ETFs manage to avoid US withholding tax, and it wouldn’t be an ultimate portfolio without a large allocation to the US, so it’s crucial to eliminate this unnecessary drag on performance. This cannot be achieved with Vanguard!

Although these exact ETFs are not in the portfolio, the comparison clearly demonstrates the effect of withholding tax on US stocks:

S&P 500 ETF comparison table

With US stocks typically yielding around 2% and a 15% withholding tax applied on this, using synthetic ETF’s should benefit the US holding of a portfolio by 0.3% every year.

Reason #2 – FTSE Indexes

Vanguard track FTSE indexes – in this context, FTSE isn’t referring to just the UK market, but is the name of an index provider for many global indexes.

Tracking FTSE indexes isn’t a problem per se but almost all the other ETF providers track those from MSCI. Therefore, you have far more choice if you were to pick just MSCI-tracking ETFs, which our ultimate portfolio does.

It’s not ideal to build a portfolio mixing index providers because MSCI and FTSE categorise countries differently and also include different market cap sizes.

So, by mixing index providers, you can accidentally double up on certain stocks and countries or miss out on others completely.

For example, if you chose an MSCI Pacific ETF and a FTSE Emerging Market ETF you would have no exposure to South Korea. If you did it the other way round you would double up your exposure to South Korea.

Reason #3 – No Small-Caps

Small-caps have outperformed larger and mid-size stocks over the long-term. If this trend continues you will wish you had allocated more of your portfolio to small-caps, but Vanguard do not have a small-cap ETF.

Also, MSCI and FTSE have different definitions of what is a small cap and what isn’t, so you would duplicate some positions.

Inside The Ultimate Portfolio

#1 – Invesco MSCI World UCITS ETF (MXWS)

The largest position in the portfolio, making up 64% of the equity, is the Invesco World ETF, which tracks the performance of 23 developed markets including the UK, Switzerland, France, Canada, and so on. It has a dominant position in the US at around 66% weighting with the next biggest, Japan, only making up 7.7%.

This might sound like an excessive allocation to the US, particularly if you’ve seen slightly lower allocations from other world ETFs, perhaps the Vanguard FTSE All-World ETF.

This is because this Invesco ETF is just tracking the MSCI developed markets. We will be adding in a dedicated emerging market ETF for that exposure which will bring these developed allocations down for the portfolio as a whole.

Even then though, you might think that’s still excessive to invest so much in the US, but it just reflects the size of the US stock market relative to the rest of the world.

It’s the US where you’ll find the lion’s share of the biggest and best companies in the world – Apple, Microsoft, Google, Coca-Cola, McDonalds, Johnson and Johnson. The list goes on.

So why the Invesco MSCI World ETF? First, it’s a synthetic ETF and so gives us the tax advantages that we already looked at.

It does cost quite a chunky 0.19% but at that price point it’s more important to look at the returns you get, rather than what you pay. Having said this, it’s still amongst the cheapest MSCI world ETFs and has the best returns over the last 3 years.

#2 – iShares MSCI World Small Cap UCITS ETF (WLDS)

This beauty is going to provide the supercharged small-cap growth for the portfolio. We have opted for this ETF to make up 18% of the equity – a lower allocation than the large cap ETF due to the risk but large enough to have a significant positive affect on overall returns.

Where the MSCI world index covered 85% of the market cap of developed countries, this world small cap index covers the next 14%, so combined make up 99% of the market cap in each developed country.

This index is also dominated by US stocks making up 56% of the ETF. Japan and the UK come in second and third with weightings of 11.2% and 6.7% respectively.

This iShares ETF is unfortunately physically replicated, rather than synthetic, so we will be suffering from US withholding tax but at the small-cap end of the market there is less choice.

In fact, there’s only one other ETF tracking the MSCI World Small-Cap Index and that costs a fair bit more. The iShares ETF we’re investing in costs 0.35%.

Nevertheless, despite the hefty fee of the iShares version and likely withholding taxes dragging on performance we would expect this to kick ass over the long term.

#3 – iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM)

Another area we want to get extra exposure to is the emerging markets, particularly China, as we expect these countries to outperform.

We have decided for our portfolios to allocate 18% of the equity to this ETF – more EM exposure than what you would get from a bog-standard world tracker.

This index is heavily weighted to four countries, which make up around 73% of the ETF between them.

The largest – China – by itself has a weighting of 37%, and we would expect this to continue increasing proportionally as China’s market develops and becomes more accessible.

With the developed markets we chose to use two separate ETFs – one for large caps and one for small caps. We wanted to do the same with the emerging markets for the flexibility but unfortunately, the cost of a small cap emerging market ETF is too expensive with the cheapest costing 0.55%.

Instead, we’re investing in a single emerging market ETF which covers both large and small caps. The iShares Emerging Markets IMI ETF is awesome, and covers 99% of the market cap, which is what the IMI in the name signifies.

This ETF costs just 0.18%, which we think is very reasonable considering the stock markets that it gives you access to.

Precious Metals

#4 – iShares Physical Gold ETC (SGLN) and #5 – iShares Physical Silver ETC (SSLN)

Gold and Silver are real money and have a history of protecting a portfolio against economic turmoil – the kind of turmoil that we seem to be experiencing far too often these days.

When world governments print trillions of dollars’ worth of currency, they are forgetting that fiat currencies like the US dollar, the Euro, and the British Pound are only based on belief.

Investors are choosing to protect their wealth from destruction by investing in precious metals like gold and silver. Stocks tend fall in bad economic times and precious metals tend to rise, therefore contribute to a well-diversified portfolio.

Both these ETCs are low cost with the gold one costing just 0.15% and the silver one costing 0.20%. They provide a cheap way to hold physical gold and silver without having the risk, cost, and upheaval of storing it yourself.

For this portfolio we want 10% of the entire portfolio to be allocated to precious metals, and with gold the default choice and with the most demand we have gone with 7.5% gold and 2.5% silver. We may tweak this percentage over time in line with wider economic factors and trends.

Portfolio Overview

This portfolio has been built by us, for us, and if you plan to copy it you might prefer to modify it slightly, so it meets your needs. Some of you might like to add in Bonds for example.

Or use these ETFs as a baseline that you build upon, maybe adding areas you see value in such as the UK market, Oil, Renewable Energy, or whatever else you’re bullish about.

Here is what the portfolio looks like:

Portfolio table

In our portfolios we also like to hold some P2P Lending and Cash.

If you’ve been paying attention and adding up the allocation figures as you went, you might have discovered that they didn’t add up to 100%.

That was because the equity allocations we gave earlier was just for the equity alone. We have opted to allocate 75% of the overall portfolio to equity causing the equity allocation to be reduced overall. Hopefully, that is clear from this table.

The overall OCF comes in at a tidy 0.21% and the portfolio is as tax efficient as we could reasonably make it. Between the 3 equity ETFs, we’re covering 99% of the developed and emerging markets across large, medium, and small-cap stocks.

We also have some flexibility in how much we allocate to each of these key positions, and crucially it is an easily maintained portfolio.

Portfolio Overview – Geographies

Here is the portfolio by region based on the exact allocation we used:

Geographies pie

As we’ve already touched upon it is overwhelmingly weighted towards North America, which is mostly the US with a little bit of Canada.

You’ll notice that the UK is relatively small but as we discussed recently in a dedicated home bias video, linked below, we see no substantial reason to overweight the UK.

If we look at the big countries it looks as we would expect for coverage of the major economies, perhaps with a little too much Taiwan and Korea. But to avoid overcomplicating the portfolio it’s good enough.

Portfolio Overview – Sectors

We’re not too fussed about the sector breakdown as long as it is widely diversified – and as we have built a world portfolio, we would expect this.

Here is the portfolio by sector based on the exact allocation we used:

Sectors table

We’re big fans of technology, so it’s good to see this take up such a prominent position at 20% of the equity allocation. With US tech stocks like Google, Apple and Microsoft so dominant these days this comes as no surprise.

The Energy allocation seems quite low, but this is likely to be due to the time of filming. Covid has caused oil stocks to tank and we would expect these to grow in relative terms as the economy picks back up.

Some people like to hold a substantial property allocation in their portfolios, so with Real Estate making up just 4% of the equity, if you’re one of them, you may want to add in a REIT ETF to increase this.

The Portfolio Historic Performance

History is a decent indicator of what we can expect in the future, but most of these ETFs only have a few years of history.

What we can do instead is look at how the indexes that they’re tracking have performed for as long as we can get hold of data, which varies for each index.

The World index has returned 9.7% annually over the last 51 years. Let’s hope we can see more of this!

The small-cap index has returned 9.5% annually over 20 years. This might look lower than the large caps but if we relook at the World index over the same 20 years, then that has returned 6.4% annually, so small caps have smashed their larger counterparts over the same time period.

The EM index over the same 20 years has returned 9.6%. If these 20-year trends continue then it supports having larger allocations to small-caps and emerging markets as we have done.

And finally, Gold has returned 5% annually over 42 years and Silver has returned 4.7% annually over 53 years, but at times have had decades-long bull markets, which we may be in the middle of right now.

What We’re Doing Now

We both plan to eventually move our ETF positions to this portfolio in its entirety, but this will be done gradually to keep trading fees to a minimum.

What do you think of this portfolio? Let us know in the comments below.

Also check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

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  1. Thanks for sharing, the equity portfolio here is perfect for what I’m looking for but why no bonds? Do the commodities provide a hedge Gilts and bonds don’t?

  2. Great suggestions; sure I’ll be looking to move in this direction. If I may ask (please excuse my ignorance); is there a reason why you’ve tailored this portfolio specifically on funds which are exchange traded (ETFs) rather than regular/non traded funds?

    • We love ETFs for their low fees and immediate access. Index funds are fine too, but they are not available on many of the popular investment platforms (while ETFs are).

  3. I like your equity and PM allocations but the portfolio desperately needs at least some government bonds. Unlike cash which provides no income and P2P lending which is risky, bonds are relatively low risk and provide growth. They’ve also historically been the best asset to protect against stock market crashes (beating gold). Global stocks have had a great 10 year run, but for 10 years before that they were practically flat.

    • If we were in any time period before the 2008 crash, we’d agree with you. But zero interest rates have changed things – bonds may no longer be the defender of the downside in a market crash. They still serve to reduce portfolio volitility but don’t necessarily reduce risk siginificantly over the long term, if you have time to ride out volitility. Gold however does still correlate negatively against stocks in crashes, as far as we can tell. For this reason we avoid bonds, except where we are applying leverage – then bonds are almost essential (a topic for a soon to be released video). Ben

  4. Are you not afraid to use synthetic ETF’S ? You will own shares as long as bank will be in good condition. Very risky for long term portfolio….

    • No because you physically own a different set of shares as collateral, and swap the retruns on them with a bank for the returns of the index you want to track. The synthetic ETF we both invest in physically holds hundreds of big blue chip stocks like Apple and Berkshire in the background, so if the banks couldn’t execute the swap, we still own something. Ben

  5. Hi guys, love the channel! Just wondering why you favour the World funds vs. the S&P 500 for the ultimate portfolio? I’ve seen some of your videos saying the S&P 500 has outperformed the World funds, do you expect this to change?

    • Simply hedging our bets with greater diversification. Owning the world means we can include global small caps too, and the emerging markets. Who knows if emerging markets will boom or not, but small caps have historically outperformed large caps over the long term.

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