Two ETFs, Zero Fees: The 60/40 Retirement Portfolio That Costs Nothing to Own

The traditional 60/40 portfolio took a beating in 2022 because its two supposed diversifiers fell at the same time. Stocks entered a bear market while rapidly rising interest rates hammered bond prices, particularly longer-duration fixed income. That exposed one of the strategy’s weaknesses: bonds don’t provide much diversification against stocks when inflation is the problem and interest rates are being repriced sharply higher.

Today, though, bonds are starting from a much better position. Yields are higher, giving investors more income upfront. Every investment strategy eventually encounters a market environment where it looks broken, and 60/40 is no exception. But the basic idea has endured because it’s simple: combine the long-term growth potential of stocks with the income and generally lower volatility of bonds, then periodically rebalance between them.

There are countless ways to modify that formula. You can add international stocks, factor tilts, inflation-protected bonds, or alternatives. My version today goes in the opposite direction. It strips the portfolio down to two ETFs and eliminates fund fees entirely using the BNY Mellon US Large Cap Core Equity ETF (BKLC) and BNY Mellon Core Bond ETF (BKAG).

Two ETFs With 0% Expense Ratios

BKLC handles the 60% equity allocation. It tracks the Solactive GBS United States 500 Index TR, providing exposure to roughly 500 large U.S. companies. It’s effectively BNY’s answer to an S&P 500 ETF, except the fund doesn’t pay to license the S&P 500 benchmark and has a true 0% expense ratio with no waiver gimmicks.

The results have been competitive. As of Sept. 30, BKLC had returned 13.95% annualized over the trailing five years. That doesn’t mean BKLC will always outperform an S&P 500 ETF. Its Solactive benchmark differs from the S&P 500, so constituent selection and weighting can produce modest performance differences.

The remaining 40% goes into BKAG, which provides broad investment-grade U.S. bond exposure, filling essentially the same portfolio role that a conventional aggregate bond ETF would. Its holdings span major parts of the investment-grade fixed-income market, including U.S. Treasuries, agency mortgage-backed securities, and investment-grade corporate bonds.

Like BKLC, BKAG has a 0.00% expense ratio. The difference compared with a few years ago is that investors are now being paid considerably more to own those bonds. BKAG currently pays a much higher 5.21% 30-day SEC yield. At today’s yields, it can generate meaningful income while providing a source of relatively defensive assets that can potentially be rebalanced into stocks.

Put $1 million into a conventional 60/40 allocation and the implementation couldn’t be much simpler: $600,000 in BKLC and $400,000 in BKAG. No fund management fees, two holdings to monitor, and broad exposure to U.S. stocks and investment-grade bonds.

It Doesn’t Have to Be 60/40

I wouldn’t get overly attached to the 60/40 numbers themselves. The appropriate allocation depends on your time horizon, spending requirements, risk tolerance, and ability to withstand equity drawdowns. A younger or more aggressive investor might prefer 80% BKLC and 20% BKAG.

The more important part, in my view, is having a systematic plan. Decide on the allocation beforehand. Establish when you’ll rebalance, whether that’s annually, semiannually, or when the portfolio moves beyond predetermined bands. Reinvest distributions when you don’t need the income. Then leave it alone.

A two-fund portfolio isn’t going to outperform every year. Sometimes international stocks will lead. Sometimes small caps or value stocks will outperform large caps. Sometimes both stocks and bonds will fall together, as they did in 2022. But trying to redesign the portfolio every time leadership changes defeats much of the purpose.

For a retiree who wants something inexpensive and easy to maintain, 60% BKLC and 40% BKAG gets the core ingredients right. You get equities for growth, bonds for income and diversification, and a 0% expense ratio on both sides. Set the allocation, rebalance systematically, and spend the rest of your time enjoying retirement instead of managing it.

Contact [email protected] for any questions or corrections.