When your primary retirement savings are fully optimized and your financial safety net is secure, a common challenge arises: what to do with excess capital? Many find themselves with accumulating funds that lack a clear investment direction beyond their traditional 401(k) and housing investments. A taxable brokerage account often presents the logical next step, and certain Exchange Traded Funds (ETFs) are particularly well-suited for expanding your investment horizon. These include the Vanguard Total International Stock ETF (VXUS), the Avantis U.S. Small Cap Value ETF (AVUV), and the Schwab International Dividend Equity ETF (SCHY). Each of these instruments addresses specific areas of diversification that are typically underserved by standard workplace retirement schemes.
The structure of most 401(k) plans heavily favors U.S. large-cap index funds, with target-date funds sometimes encompassing the remainder of the portfolio. While this approach offers a foundational investment strategy, it often overlooks crucial segments of the market. Consequently, your investment strategy might be overly reliant on a single market sector, primarily American large corporations. Establishing a taxable account allows you to rectify these imbalances and broaden your portfolio's reach without needing to juggle an extensive list of individual securities.
The Vanguard Total International Stock ETF (VXUS) provides comprehensive exposure to global equities, spanning diverse markets from European industrial giants to Japanese exporters and emerging-market financial entities. Managed with a minimal expense ratio of 0.05%, VXUS ensures that the vast majority of your investment capital is actively working for you. With impressive performance metrics, including a 15.92% year-to-date return and a 25.38% return over the past year (as of August 19), alongside a 10-year return of 146.84%, this ETF offers substantial growth potential. Additionally, it provides quarterly distributions, making it an ideal choice for instantly diversifying your portfolio's global footprint if your 401(k) predominantly holds U.S. equities. The Avantis U.S. Small Cap Value ETF (AVUV) caters to the often-neglected small-cap value sector. Academic studies have consistently shown that small-cap value stocks tend to outperform the broader market over extended periods, a characteristic often absent from typical 401(k) offerings. AVUV, managed by Avantis, is a preferred choice for professional asset allocators seeking exposure to this segment, boasting approximately $27.1 billion in net assets as of May 31. This fund invests in hundreds of smaller American enterprises selected for their value and profitability across various sectors such as financials, industrials, consumer discretionary, energy, and healthcare. Its robust returns, including a 24.79% year-to-date increase and an 89.64% five-year return, demonstrate its capacity to capture growth premiums not typically found in S&P 500-centric portfolios. Lastly, the Schwab International Dividend Equity ETF (SCHY) offers an alternative approach to international investing by focusing on high-quality dividend-paying companies in both developed and emerging markets, all while maintaining low fees. As of May 31, SCHY held about $2.27 billion in net assets, with significant stakes in major global corporations. This ETF provides quarterly distributions, offering a steady stream of income directly into your brokerage account from international companies you might not otherwise consider investing in individually. With solid returns, including a 23.07% increase over the past year and a 54.99% gain over five years, SCHY rounds out a diversified investment strategy.
While these investment vehicles offer compelling advantages, it's essential to acknowledge potential risks. International equities can underperform U.S. markets for extended periods, and there's no guarantee that recent shifts in performance indicate a permanent trend. Small-cap value stocks, as represented by AVUV, are prone to significant downturns during economic uncertainties, necessitating an expectation of volatility. Furthermore, foreign dividends from SCHY are subject to currency fluctuations and foreign withholding taxes, which can impact your net yield, particularly in taxable accounts where tax credit complexities arise. Nonetheless, for investors with surplus cash and a 401(k) heavily weighted towards U.S. large-caps, these three ETFs effectively provide much-needed diversification, a growth-oriented tilt, and income exposure that complements existing retirement savings. This strategic expansion is precisely what a well-managed taxable brokerage account is designed to achieve.
