Create a Set-and-Forget Portfolio With Just 2 ETFs

By Joey Frenette at The Motley Fool Canada

You don’t need to own a whole slate of exchange-traded funds (ETFs), since most of them already check that diversification box automatically unless, of course, we’re talking about a narrow-sector ETF or something of the sort. Of course, just because a broad index ETF is quite well diversified doesn’t mean that your sector breakdown will be ideal or even well-diversified. There’s a difference between diversification and optimal diversification.

When it comes to the TSX Index, it’s quite well diversified, as there are a ton of stocks within a number of industries. However, stepping back, the breakdown for investors will mean an overweighting in financials and energy. Sure, there’s tech and consumer staples, but in my view, it’s just not enough to get your overall portfolio sector allocation where it needs to be. That’s why adjusting weightings across ETFs, even broad ETFs, could make a lot of sense.

Many Canadians are probably well aware of how concentrated the Canadian stock market is in the financial and energy sectors. For most, the solution is to just load up on the S&P 500, which represents a number of sectors and industries that the TSX Index doesn’t.

With the great run-up in tech stocks amid the AI boom, though, even the S&P 500 isn’t as diversified as it used to be. It’s gotten heavier in tech, with the Magnificent Seven plus a few AI-related gainers boasting heavy weights at the top; it feels like the bottom 490 stocks aren’t really getting as much representation as you’d think. Either way, this piece will look into two ETFs that I think could be a magnificent complement for Canadian investors looking to set and forget for decades at a time.

The only ETFs passive investors need?

First, the S&P 500 is a must-have. For cost-effectiveness, I like Vanguard S&P 500 Index ETF (TSX: VFV) for most accounts (especially the Tax-Free Savings Account), with the exception of the Registered Retirement Savings Plan (RRSP). For the RRSP, you’ll want a U.S.-traded version for dividend tax efficiency purposes. In any case, with the VFV, you’re getting all that tech exposure that stands to win as the AI revolution takes hold.

And while the Mag Seven are over-represented within the index, I’d say that’s a good thing, especially considering valuations are quite modest and that gains could arrive for the hyperscaler names that own the infrastructure once the AI monetization wave finally does hit. It’s a tech-heavy index for sure, but one that’s still worth owning.

Another ETF that I’d be more than willing to look at is iShares Core Equity ETF Portfolio (TSX: XEQT), a one-stop shop offering that pretty much covers all bases for passive investors who would rather think about things beyond investing. With a focus on long-term capital appreciation, the fund of funds (or ETF of ETFs) provides exposure to the U.S. (a 45% or so allocation), Canada (24%), and the rest of the world, including emerging markets.

All considered, it’s a stellar fund that’s incredibly low-cost, with a management expense ratio (MER) of 0.17% (and probably poised to keep falling). For set-and-forget investing, the XEQT is really all you’ll need, but in my opinion, I’d want the extra U.S. tech exposure, so I’d pair it with something like VFV or any other S&P 500 ETF.

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