What is the 3 ETF strategy? (2024)

What is the 3 ETF strategy?

The three-fund ETF portfolio strategy follows the same format as the more broad three-fund portfolio. It allocates stock and bond investments among three types of exchange-traded funds: a total U.S. stock market index fund, a total U.S. bond market index fund, and a world stock market fund (without U.S. investments).

A 3 fund portfolio is a diversification approach whereby the investors put their money in a certain ratio in three different asset classes, i.e., domestic stocks, domestic bonds, and international stocks. It is a simple, low-cost investing approach that ensures retirement savings at a minimal risk appetite.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.

Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments.

The Three Fund Portfolio, also called the Lazy Portfolio, is a simple yet popular portfolio amongst passive index investors. It is designed to provide broad diversification across the stock and bond markets while incurring minimal costs, taxes, and overhead.

How do ETFs work? Exchange-traded funds work like this: The fund provider owns the underlying assets, designs a fund to track their performance and then sells shares in that fund to investors. Shareholders own a portion of an ETF, but they don't own the underlying assets in the fund.

Dividend ETFs

This kind of ETF is usually more stable than a total market ETF, and it may be attractive to those looking for investments that produce income, such as retirees. The best dividend ETFs tend to offer higher returns and low cost.

Who is the king of ETFs?

The reigning king

The SPDR S&P 500 ETF Trust (SPY) remains at the forefront of S&P 500 ETFs, boasting an impressive $478 billion in assets under management (AUM). Remarkably, this ETF celebrated its 31st anniversary on January 22, 2024, coinciding with the day the S&P 500 index reached its recent all-time high.

This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.

VTI is a total U.S. market fund and holds more than 3,500 stocks. VTI is better diversified and benefits from small and mid-cap stocks that grow into large caps. VOO is less diversified, tracking the performance of the S&P 500 Index. VOO excludes small and mid-cap stocks.

The task, then, is to take these three basic non-cash assets — domestic stocks, international stocks, and bonds — decide how much of each to hold (your asset allocation). Choose where to hold each of these asset classes, and finally choose a mutual fund to use for each asset class.

The 4-3-2-1 Approach

One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance.

There are many types of investments to choose from. Perhaps the most common are stocks, bonds, real estate, and ETFs/mutual funds.

In conclusion, the 4 golden rules of investment - start early, watch out for costs, stick to your goals, and diversify - collectively play a crucial role in building a resilient and rewarding investment portfolio.

Here are a few popular options: An 80/20 three-fund portfolio with 64% U.S. stocks, 16% international stocks, and 20% bonds. This option prioritizes growth and is good for investors with high risk tolerance. An equally weighted three-fund portfolio with 33% to 34% in each asset.

Who are the big three fund managers?

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost ...

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

Hedging strategies with ETFs allow investors to keep their portfolios intact, which may reduce tax consequences and trading costs. Hedging strategies are best used for short-term and tactical purposes, particularly those employing inverse and leveraged ETFs.