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Global Stock and Bond Diversification With Just 2 ETFs

This fall, individual investors could be able to use just two exchange-traded funds (ETFs) to diversify both globally and by asset class. The annual expense of such a portfolio will be about one-tenth of a penny per dollar invested, exclusive of any transaction costs.

Vanguard filed a preliminary registration statement with the U.S. Securities and Exchange Commission (SEC) on Monday to launch a global bond fund. The Vanguard Total World Bond ETF will provide exposure to both domestic and foreign investment-grade bonds. The fund giant already has a similar ETF on the equity side, Vanguard Total World Stock (VT).

This could be a sign of the direction that the biggest ETF providers may be headed in. The plain-vanilla space is already dominated by the likes of SPDR S&P 500 (SPY), Vanguard Total Stock Market (VTI), iShares MSCI EAFE (EFA), PowerShares QQQ (QQQ), etc. Expense ratios have been cut on the largest ETFs and could eventually fall even closer to 0%. The smart beta category is getting crowded on the domestic side, with newer entrants such as Goldman Sachs and AQR Capital Management having already thrown their hats into the ring. Thematic ETFs continue to be rolled out, but have mostly remained in the shallow end of the pool with low levels of both assets and trading activity. Bluntly put, the ETF industry is maturing and, with the possible exception of actively managed funds, the amount of room for new ideas is getting to be rather small.

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Highlights from this month’s AAII Journal


AAII Sentiment Survey

Optimism about the short-term direction of the stock market continued to rebound and is now at a three-month high. More about this week’s results.
This week’s results:
  • Bullish: 38.6%, up 1.9 points
  • Neutral: 36.3%, down 6.5 points
  • Bearish: 25.2%, up 4.6 points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.


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The Week Ahead

The U.S. financial markets will be closed on Monday, May 28, in observance of Memorial Day.

The earnings calendar lists nine S&P 500 companies: Salesforce.com Inc. (CRM) and HP Inc. (HPQ) on Tuesday; Analog Devices Inc. (ADI), Michael Kors Holdings Ltd. (KORS) and PVH Corp. (PVH) on Wednesday; and Costco Wholesale Corp. (COST), Dollar General Corp. (DG), Dollar Tree Inc. (DLTR) and Ulta Beauty Inc. (ULTA) on Thursday.

The week’s first economic reports will be the March S&P Case-Shiller home price index and the Conference Board’s May consumer confidence survey, released on Tuesday. The May ADP employment report, the first revision to first-quarter GDP, April international trade and the Federal Reserve’s periodic Beige Book will be released on Wednesday. Thursday will feature April personal income and spending, the May Chicago Purchasing Managers Index (PMI) and the April pending home sales index. May motor vehicle sales, the May jobs data (including the change in nonfarm payrolls and the unemployment rate), the May PMI Manufacturing Index, the Institute for Supply Management’s (ISM) May manufacturing index and April construction spending will be released on Friday.

Two Federal Reserve officials will make public appearances: St. Louis president James Bullard on Tuesday and Atlanta president Raphael Bostic on Thursday.


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