"Out of clutter, find simplicity." -- Albert Einstein
There are more than 5,000 exchange-traded funds in use around the world, according to research firm ETFGI. Yet to build retirement wealth, you may only need two of them.
Yes, just two.
The Vanguard Total Stock Market ETF (VTI 1.72%) and the Vanguard Total International Stock ETF (VXUS 0.68%) give investors access to a broad spectrum of global stocks that offer tremendous wealth-building potential. Read on to learn more about them.
These two ETFs can help investors profit from the growth of the global economy. Image source: Getty Images.
A solid foundation of U.S. stocks
S&P 500 Index funds have longed formed the foundation of many investors' retirement portfolios -- and for good reason; these ETFs give investors low-cost, diversified access to 500 of the largest publicly traded businesses in the U.S., and they consistently outperform about 80% of actively managed funds.
However, the Vanguard Total Stock Market ETF takes this index strategy an important step further by also including mid- and small-cap stocks. This helps to further diversify the fund, thereby reducing risk. It also adds an additional element of growth -- and therefore, return potential -- as smaller companies tend to outperform larger companies over time. Additionally, by including more than 3,600 large-, mid-, and small-cap stocks, the Vanguard Total Stock Market ETF offers investors a means through which to profit from the growth of nearly the entire U.S. economy.
These factors were likely part of the reason Vanguard recently removed its popular S&P 500 index fund from its own employees' 401(k) accounts. Vanguard told MarketWatch:
We believe the Total Stock Market Index Fund is the best proxy for the U.S. market, offering exposure to large-, mid-, and small-cap stocks, whereas Vanguard Institutional Index Fund concentrates on large-cap stocks.
I think Vanguard is correct.
Importantly, Vanguard's fees for VTI are some of the lowest in the industry, at 0.04%. That's only about $4 per $10,000 invested per year. Thus, almost all of the gains generated by this ETF will flow to investors, rather than to the fund company's coffers.
The benefits of international diversification
Retirees seeking even more growth and diversification may wish to add an international component to their portfolios. One great way to do so is with the Vanguard Total International Stock ETF.
This ETF gives investors access to more than 6,000 non-U.S. stocks. Developed markets such as Japan and the United Kingdom account for about 80% of the fund's investments, while fast-growing emerging markets such as China and India account for the remaining 20%. In turn, the Vanguard Total International Stock ETF gives investors the opportunity to profit from the growth of most of the world's major economies, many of which are growing faster than the U.S. Better still, a portfolio that contains both U.S. and international stocks should have a greater expected return profile, and a lower overall risk profile, thanks to the benefits of diversification.
Moreover, like VTI, Vanguard's fees for VXUS are low, at only 0.11%. That's about 90% less than the average expense ratio of similar international funds.
All told, the Vanguard Total Stock Market ETF and the Vanguard Total International Stock ETF give investors a relatively simple -- yet powerful -- way to profit from the long-term growth of the global economy.
