When I approach long-term investing, my aim is clarity, consistency, and compound returns. Over decades, the noise of market timing, speculative tips, and fleeting trends falls away. What matters most is choosing solid foundations. In my experience, two ETFs provide that foundation: the Vanguard Total Stock Market ETF (VTI) and the Vanguard Total International Stock ETF (VXUS). These two offer diversified exposure that mirrors the global economy. I’ll explain why I believe these are the only two ETFs an investor might ever need to buy and hold forever.
Understanding ETF Fundamentals
Exchange-Traded Funds (ETFs) allow investors to buy a basket of assets with one purchase. Unlike mutual funds, ETFs trade on stock exchanges. They offer low fees and tax efficiency. A well-constructed ETF can deliver consistent returns without active management. Let me first define total returns:
\text{Total Return} = \frac{\text{Ending Value} - \text{Beginning Value} + \text{Dividends}}{\text{Beginning Value}}A high-quality ETF maximizes this over time while minimizing volatility.
ETF #1: Vanguard Total Stock Market ETF (VTI)
What It Tracks
VTI tracks the CRSP US Total Market Index. It includes large-, mid-, small-, and micro-cap stocks across sectors. With over 4,000 holdings, it captures the full breadth of U.S. publicly traded companies. This gives VTI a key advantage: total domestic equity exposure with one low-cost investment.
Expense Ratio and Fees
VTI has an expense ratio of just 0.03%. That means on a $10,000 investment, annual fees total $3. Compare that to actively managed funds charging 1% ($100 on $10,000).
Why VTI Works for the Long Term
Historical data supports the resilience of the U.S. economy. According to the Federal Reserve, from 1926 to 2023, U.S. equities have returned about 10% annually. VTI captures this return with minimal drag. Let me illustrate:
Assume a $10,000 investment in VTI compounds annually at 9.8% (after expense ratio). In 30 years:
FV = 10000 \times (1 + 0.098)^{30} = 10000 \times (1.098)^{30} \approx 165,223That’s more than 16 times the original investment. No market timing. No guesswork.
Sector and Market Cap Exposure
| Sector | % of Holdings (Approx.) |
|---|---|
| Information Tech | 26% |
| Health Care | 13% |
| Financials | 11% |
| Consumer Discretionary | 10% |
| Industrials | 9% |
| Others Combined | 31% |
This sector spread cushions against downturns in any single area. Even during crises like the dot-com bust or COVID-19, the market eventually rebounds.
Tax Efficiency
ETFs like VTI are structured to minimize capital gains distributions. This matters for long-term investors in taxable accounts. You keep more of your gains.
ETF #2: Vanguard Total International Stock ETF (VXUS)
What It Tracks
VXUS follows the FTSE Global All Cap ex US Index. It holds over 7,000 stocks from developed and emerging markets outside the U.S. This includes Europe, Asia, Latin America, and more.
Expense Ratio
VXUS also charges 0.07%. On $10,000, that’s $7 per year. Given the geographic spread, that’s an efficient way to access global growth.
Why VXUS Complements VTI
U.S. markets don’t always outperform. In fact, between 2000 and 2010, international stocks outpaced U.S. returns. Diversification by geography reduces risk and improves expected returns. Assume the following annual growth rates:
- VTI: 9.8%
- VXUS: 7.2%
If I split my $10,000 portfolio 60/40 between VTI and VXUS:
\text{Total Future Value} = 6000 \times (1.098)^{30} + 4000 \times (1.072)^{30} \approx 6000 \times 16.5223 + 4000 \times 8.3700 = 99,133 + 33,480 = 132,613That’s still a 13x growth overall, but with global exposure.
Country Allocation Example
| Country | Approx. % in VXUS |
|---|---|
| Japan | 15% |
| UK | 10% |
| China | 9% |
| Canada | 7% |
| France | 6% |
| Germany | 5% |
| Emerging Mkts | 25% |
| Others | 23% |
These allocations shift with market capitalization but provide long-term exposure to global growth.
Risk Management through Diversification
A common question I face is, “Why not just VTI?” While U.S. dominance feels stable, global dynamics change. Emerging markets can grow faster than mature economies. Diversification protects against U.S.-specific downturns like those during the 1970s oil crisis or the 2008 financial collapse.
Correlation Insight
When VTI and VXUS move independently, they reduce portfolio volatility. Assume a correlation coefficient of 0.6. Using portfolio standard deviation:
\sigma_p = \sqrt{w_1^2 \sigma_1^2 + w_2^2 \sigma_2^2 + 2w_1w_2\sigma_1\sigma_2\rho}If:
- w_1 = 0.6 (VTI), \sigma_1 = 15%
- w_2 = 0.4 (VXUS), \sigma_2 = 18%
Then:
\sigma_p = \sqrt{(0.6)^2 (0.15)^2 + (0.4)^2 (0.18)^2 + 2(0.6)(0.4)(0.15)(0.18)(0.6)} \approx 14.16%This is lower than either ETF’s individual risk, proving diversification reduces overall volatility.
Implementation Strategy
I use automatic monthly investments to build my positions in both ETFs. This method, known as dollar-cost averaging, spreads out risk. For taxable accounts, I prioritize tax-loss harvesting opportunities. In retirement accounts, I rebalance annually.
| Account Type | Suggested ETF Allocation |
|---|---|
| Roth IRA | 60% VTI / 40% VXUS |
| Traditional IRA | 60% VTI / 40% VXUS |
| Taxable Brokerage | 70% VTI / 30% VXUS |
Real-World Examples
Consider two investors. Investor A holds only VTI. Investor B splits between VTI and VXUS. In the 2010s, VTI outperformed. But in the 2000s, VXUS outperformed. Over 30 years, B’s smoother ride often wins psychologically, reducing panic-selling.
Common Objections and My Responses
“International markets underperform.” Yes, recently they have. But that’s cyclical. Just like sectors rotate, so do geographies. You don’t want to overweight only after outperformance.
“What about bonds?” I view bonds as risk dampeners. But for long-term growth, equities dominate. I hold bonds in late-stage retirement but not in accumulation phases.
“What about REITs or commodities?” These offer tactical plays, not foundational ones. VTI includes REITs as a sector. Commodities lack cash flows, which makes long-term compounding unreliable.
Conclusion: Simplicity as a Strategy
I’ve found the simplest portfolios often outperform complex ones. VTI and VXUS provide broad exposure, low costs, and automatic diversification. They allow me to focus on saving more, not second-guessing markets. I don’t need to forecast interest rates, earnings reports, or geopolitical shifts. I just invest, hold, and let time do the heavy lifting.
These two ETFs, held consistently, align with a lifelong investing plan. They represent the global economy—no frills, no gimmicks. Just a calm, proven path to wealth.
If there’s one idea I’d pass to the next generation of investors, it’s this: buy the world, own it forever, and let compounding do the rest.
