The Best Funds for Rebalancing in 2023These top-rated ETFs and mutual funds can bring balance to portfolios with off-kilter asset allocations.The Best Funds for Rebalancing in 2023
For many investors, reviewing the asset allocations of their portfolios sounds about as appealing as a visit to the dentist.
But after a tough year for U.S. stocks, U.S. bonds, and international stocks in 2022, is rebalancing a must-do in 2023?
“If you’re in your 30s or 40s and you think you have at least 20, 25 years until retirement, you probably don’t need to do a lot of shifting around in terms of your portfolio’s asset class exposures,” says Morningstar director of personal finance and retirement planning, Christine Benz.
However, if you’re nearing retirement—someone older than 50 and getting within 10 to 15 years of retirement—Benz suggests taking a hard look at your asset mix, especially if you haven’t rebalanced in several years.
To Benz’s point, even after struggling in 2022, the Morningstar US Market Index, which is a proxy for the broad U.S. stock market, is up about 9% per year for the trailing five-year period as of this writing. Meanwhile, the Morningstar US Core Bond Index is barely in the black over the same period, and the Morningstar Global Markets ex-US Index is up just over 2% annually over that same stretch. As such, investors who haven’t made rebalancing a habit may find that their portfolios are still heavier on U.S. stocks than they should be today and lighter on bonds and international stocks.
If you already own a solid bond or international stock ETF or mutual fund, it may make most sense for you to jettison some dollars from elsewhere in your portfolio to these existing holdings rather than initiate new positions. But if you’re in the market for a bond or international stock ETF or mutual fund, here are some ideas to research further.
The Best Bond ETFs and Mutual Funds for Rebalancing
Those looking for solid core bond ETFs or mutual funds should begin their search with highly rated funds in the intermediate core bond or the intermediate core-plus bond Morningstar Categories. Funds in both categories invest largely in investment-grade U.S. fixed-income issues, including government, corporate, and securitized debt; they usually maintain durations that range from 75% of 125% of the three-year average effective duration of the Morningstar Core Bond Index. The difference: Core-plus funds have more flexibility to own noncore bonds, such as corporate high-yield, bank-loan, and emerging-markets debt. Funds in both categories therefore provide a lot of diversification in a single holding, and as a result they don’t court excessive interest-rate or credit risk.
These ETFs and mutual funds all land in either the intermediate core bond or the intermediate core-plus bond category and have at least one share class that earns our highest Morningstar Analyst Rating of Gold as of Jan. 15, 2023.
1) American Funds Bond Fund of America ABNFX
2) Baird Aggregate Bond BAGIX
3) BlackRock Total Return MAHQX
4) Dodge & Cox Income DODIX
5) Fidelity Total Bond FTBFX
6) Fidelity Total Bond ETF FBND
7) Fidelity US Bond Index FXNAX
8) iShares Core US Aggregate Bond ETF AGG
9) Loomis Sayles Core Plus Bond NERYX
10) Metropolitan West Total Return Bond MWTNX
11) Pimco Total Return PTRAX
12) Vanguard Total Bond Market ETF BND
13) Vanguard Total Bond Market Index VBTIX
Of course, investors can expand their reach beyond these two bond fund categories. If you’re investing in a taxable account and you’re in a high tax bracket, for instance, a municipal bond fund might be a better fit for you. Or if you’re in retirement or on the precipice, you might be in the market for shorter-term bond funds, or funds that invest in inflation-protected securities.
Find more top-rated bond ETFs and mutual funds from a variety of categories in The Best Bond Funds.
The Best International Stock ETFs and Mutual Funds for Rebalancing
When it comes to international fare, we suggest using a well-diversified, large-cap-focused fund as the core; you’ll find such funds in the foreign large-cap blend category. Foreign large-cap funds tend to focus on Europe, specifically established markets in France, Germany, Switzerland, the Netherlands, Spain, Italy, and the United Kingdom. They often hold significant positions in Asia as well. And although they dabble in emerging-markets stocks, they often cap their exposure to those markets to about 15% of assets. Those funds in the foreign large-cap blend category invest in stocks with both growth and value characteristics.
These ETFs and mutual funds all land in the foreign large blend category and have at least one share class that earns our highest Morningstar Fund Analyst Rating of Gold as of Jan. 15, 2023.
1) American Funds International Growth and Income IGFFX
2) Artisan International Value ARTKX
3) DFA International Core Equity DFIEX
4) Dimensional International Core Equity Market ETF DFAI
5) FMI International FMIJX
6) iShares Core MSCI Total International Stock ETF IXUS
7) MFS International Equity MIEIX
8) Vanguard FTSE All-World ex-US ETF VEU
9) Vanguard FTSE All-World ex-US Index VFWAX
10) Vanguard Total International Stock ETF VXUS
11) Vanguard Total International Stock Index Original Post>
Here, too, investors can expand their search beyond this single international-stock category if they so choose. For instance, those who’d prefer to manage their exposures to growth and value stocks abroad will find several highly rated funds in the foreign large growth and foreign large value categories. There are also top-rated international stock funds that focus exclusively on mid- and small-cap companies, or on emerging-markets stocks.
Find more top-rated international stock ETFs and mutual funds from a variety of categories in The Best International Stock Funds.
Should You Rebalance Your Portfolio in 2023?
Even if your broad asset mix is balanced, you may find that your sub-asset classes may need some work. Perhaps your allocation to smaller-company stocks is less than you want it to be. Or you’re unintentionally favoring growth styles over value styles—or vice versa. Not sure if your portfolio’s asset allocation is out of whack? Morningstar Investor members can use our portfolio tool to find out.