Bryan Armour: Tariff talk has raised uncertainty for businesses and global economies. Change is in the air, and it could have a meaningful impact on the future of your investments.
As market trends shift, investors should add resiliency to their portfolios. Diversification should be a core goal for investors amid this uncertainty. One company, one sector, one currency, or one region could find itself worse off in a new world order, so now is a great time to put some eggs in other baskets. Today, I’ll talk about three ETFs to do just that.
3 ETFs to Diversify Your Portfolio
Avantis International Equity ETF AVDEVanguard Short-Term Inflation-Protected Securities ETF VTIPFundamental U.S. Large Company ETF FNDX
Silver-rated Avantis International Equity ETF, ticker AVDE, combines a broad international portfolio with modest factor tilts while charging a low fee. It offers exposure to developed-markets stocks of all sizes and strategically tilts toward cheaper and more profitable companies. Each stock’s market cap still plays a role in its portfolio weight, such that turnover and associated trading costs won’t drag on performance. This ETF provides a diversification double whammy.
First, adding international stocks can add ballast to a US-heavy stock portfolio, and second, it’s among the best-diversified international stock funds on the market, with over 3,000 holdings and under 7% of its assets in its top 10.
AVDE follows similar performance patterns as foreign large-blend category peers. It tends to improve on them, on average. It has banked more than 13% annualized return over the past five years, good enough to put it at the top decile of its category. We expect it to continue to be one of the best options for international investing.
The next ETF on my list is Gold-rated Vanguard Short-Term Inflation-Protected Securities ETF, or VTIP. Rising costs is a tough risk to hedge for investors. Inflation can hurt bonds and stocks simultaneously, like we saw in 2022. Short-term TIPS provide a high-quality Treasury exposure that grows its principal with inflation. Longer-duration TIPS funds offer an imperfect hedge because inflation is often fought by raising interest rates, a risk that hurts those funds’ performance, but is largely sidestepped by VTIP’s short-duration portfolio.
VTIP is among the best options in the short-term inflation protected bond category because of its sensible portfolio construction and rock-bottom fee. Historical performance echoes that sentiment. It’s landed in the category’s top-quartile returns over the past decade.
VTIP isn’t going to win any beauty pageants, but it can zig when stocks zag and add protection against inflation, making it a worthwhile ETF for any portfolio.
The final ETF on my list is Silver-rated Schwab Fundamental U.S. Large Company ETF, or FNDX. This ETF goes back to fundamentals by selecting companies based on their fundamental footprint rather than market cap. This tack positions the fund to excel when overhyped stocks sink and undervalued ones bounce.
This ETF holds over 700 stocks, effectively diversifying risks of any one company. It falls in the large-value corner of the Morningstar Style Box because of its contrarian weighting scheme, but it doesn’t shy away from growth companies. Instead, it holds them in proportion to their combination of sales, cash flow, and shareholder yield. Like in the S&P 500, Apple AAPL sits atop this value fund’s portfolio, but a high-growth company like Nvidia NVDA barely gets a 25-basis-point allocation.
The resulting portfolio is better diversified than most cap-weighted stock indexes right now, that have become increasingly concentrated in recent years. An inclusive portfolio, low fee, and fundamental tilt have fueled this ETF to top 5% performance over the past 10 years in its large-value Morningstar Category. We expect it to continue to outperform over the long run.
I hope these picks can help remove unnecessary risks from your portfolio. Make sure to tune into Morningstar’s ETF coverage at morningstar.com/topics/etfs. Stay curious and keep compounding. See you next time.
Watch 3 ETFs for a Recession for more from Bryan Armour.
The author or authors do own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
