There are plenty of advantages in using exchange-traded funds (ETFs) to fill gaps in an investment portfolio, and lots of investors mix and match ETFs with mutual funds and individual stocks and bonds in their accounts. But it's equally possible to build a complete portfolio out of nothing but ETFs, which in most cases track indexes for a variety of asset classes. In this article, we'll discuss and consider the benefits and trade-offs of an ETF-only portfolio using index ETFs. (While actively managed ETFs do exist, in this article an all-ETF portfolio refers specifically to using index ETFs only.)
How can you tell if an all-ETF portfolio makes sense for you? For the most part, it comes down to your goals and preferences. As a general rule, ETFs provide excellent diversification at a low annual operating expense ratio (OER) since many are passive funds that track a certain benchmark index. Because of this, they typically offer transparency—it's easy to see what stocks, bonds, or other investments the ETF holds each day. If these are top characteristics you look for in your investments, owning nothing but ETFs may be a straightforward yet flexible solution worth a closer look.
However, there are some trade-offs to think through. An all-ETF portfolio means giving up actively managed mutual funds, which have the potential to outperform index ETFs through professional selection of stocks and bonds. You'll also leave behind the control that comes with a portfolio composed solely of individual securities you have selected. Some people won't want to give these things up, even though these approaches have specific disadvantages as well (see table below). You'll also need to be comfortable with the risks that come with any ETF, including market risk and liquidity risk, as well as the expenses of the ETFs.
A portfolio of index mutual funds, meanwhile, would be very similar to an all-ETF portfolio with two main exceptions: ETFs trade differently than index mutual funds, and for certain niche asset classes, you can find ETFs but very few or no index mutual funds.
Some pros and cons of four types of portfolios relative to each other
| Portfolio | Pros | Cons |
|---|---|---|
| Actively managed mutual funds | - Professional active management - Potential to outperform the market - Diversified well among various securities - Largest number of fund choices | - Higher ongoing expenses - Possible underperformance - Least transparent - Higher portfolio turnover |
| Index mutual funds | - Diversified very well among various securities - Generally low ongoing expense - Seeks to match index performance (minus fees and expenses) | - Limited selection in certain asset classes - No active management - No potential to beat the index |
| All-Index ETF portfolio | - Diversified very well among various securities - Generally low ongoing expenses - Niche options available if desired - Transparency on a daily basis into the makeup of the fund - Trading flexibility - Seeks to match index performance (minus fees and expenses) | - No active management - No potential to beat the index |
| Individual stocks and bonds | - No ongoing management expenses - Maximum control - Complete transparency | - Higher transaction costs - Diversification can be more difficult - No professional management - Certain types of bonds may have low liquidity (for individual bonds) |
If you think an all-ETF portfolio might suit you, here are three ways to build one, ranging from ultra-simple to very fine-tuned.
1. Keeping it simple
One option you can consider would be using two ETFs to help provide a balanced, diversified portfolio of stocks and bonds:
- A total world stock market ETF
- A total bond market ETF
Want to browse for ETFs? You can use Schwab's ETF screener to find lots of options.
For instance, if you're an investor seeking moderate risk and decide that you want 60% of your portfolio in stocks and 40% in bonds, you could consider purchasing an all-country stock index ETF and then combine it with a bond ETF.
World stock market ETFs may track an index like the Morgan Stanley Capital International All Country World (MSCI ACWI) IndexSM, which provides exposure to US stocks, developed-market international stocks, and emerging-market international stocks.
For bonds, some ETFs track the broad Bloomberg U.S. Aggregate Bond Index, which covers:
- Treasury bonds
- Government-agency bonds
- Mortgage-backed bonds
- Investment-grade corporate bonds
- Some dollar-denominated international bonds
The advantage of this type of portfolio is its simplicity: one stock fund paired with one bond fund. It will be easy to see when you need to rebalance, since both allocations should add up to 100%. And, because ETFs trade like stocks—that is, intraday with a bid/ask spread—a two-ETF portfolio can help keep your trading costs low.1
One disadvantage of this portfolio is that it's not very fine-tuned. For instance, as of April 30, 2025, MSCI ACWI Index had 63.67% in US stocks and 36.33% in non-US stocks, according to Morgan Stanley Capital International. If you prefer to have a larger allocation to US stocks, for example, you might want two separate stock ETFs.
Another drawback to this portfolio is that it lacks any allocation to Treasury Inflation Protected Securities (TIPS), sub-investment grade bonds (also known as "high yield" or "junk bonds"), and non-dollar-denominated international bonds, not to mention other asset classes such as commodities and real estate. Additional asset classes can help further diversify your portfolio. Still, if simplicity is what you seek, the two-ETF portfolio might be an option worth considering.
2. Middle of the road
An intermediate approach to an all-ETF portfolio could consist of about eight ETFs.
For stocks, you could have:
- A large-cap US ETF
- A small-cap US ETF
- An international developed-market ETF
- An emerging-market ETF
For bonds, you could start with the same core bond ETF described above and diversify further by adding three additional ETFs to have:
- A total bond market ETF
- A TIPS ETF
- A sub-investment grade ("high-yield" or "junk") bond ETF
- An international bond ETF
The advantage of this portfolio is that it can help provide balance. It has enough ETFs to give you coverage of more asset classes and the ability to adjust your portfolio weights in most areas, but not so many funds that it becomes too challenging to keep track. The disadvantage of this portfolio is that it offers neither maximum simplicity nor maximum customizability.
3. Fine-tuned
On the other end of the spectrum from an ultra-simple ETF portfolio is a fine-tuned portfolio with 20 or more ETFs. This type of portfolio can make sense for investors who like to allocate their accounts toward exactly the parts of the market they expect to perform best.
This portfolio begins similarly to the middle-of-the-road ETF portfolio but then divides the various parts into thinner slices:
- US large-cap stocks can be divided into sectors such as financials and health care, or even narrower industries such as banks and biotech.
- The US stock allocation can further be divided to include mid-cap or micro-cap stocks, or styles such as growth and value.
- The international stock allocation can be adjusted to include international small-cap stocks, or regions such as Europe and Asia, or even individual countries like Germany and China.
The core bond index can be broken into its components:
- Treasuries
- Agency-backed bonds
- Mortgage-backed securities
- Corporate bonds
The average maturity of the bonds in the portfolio can be fine-tuned to include more long-term bonds or short-term bonds.
Commodity ETFs can also be added to the portfolio, and split into fine slices such as:
- Oil
- Gold
- Agricultural commodities
- Base metals
Real estate ETFs can be added to the portfolio and could even be split into US and global.
With the fine-tuned portfolio, it's unlikely that you would want to hold every possible ETF at the same time. For instance, rather than holding allocations to all 11 stock sectors and every individual country possible, you would likely have core allocations to certain ETFs and then add weight to the ETFs representing only those sectors or countries that appear most attractive to you.
The advantage of this portfolio is the ability to get almost exactly the exposure you want to each narrow piece of the market while still enjoying the diversification that ETFs offer over individual stocks and bonds.
The disadvantages are complexity and trading costs. With so many ETFs in the portfolio, it's important to be able to keep track of what you own at all times. You could easily lose sight of your total allocation to stocks if you hold 13 different stock ETFs instead of one or even five. In addition, with so many ETFs in the portfolio and relatively more buying and selling, the impact of bid-ask spreads could add up quickly.
1ETF shares are sold at one price (the "ask") and bought at a lower price (the "bid"). Whenever you trade, you're generally losing half of the bid/ask spread, since you either buy at the higher bid price or sell at the lower ask price.
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