The three-fund portfolio is a simple, evidence-based investment strategy: hold three broadly diversified, low-cost ETFs covering Australian shares, international shares, and bonds. It requires minimal management, delivers broad market exposure, and keeps costs as low as possible.
Why Three Funds?
The three-fund approach was popularised by the Bogleheads investing community (followers of Vanguard founder John Bogle) and has been adapted for Australian investors. The core argument:
- Two or three ETFs cover virtually all investable assets
- More funds don’t meaningfully improve diversification
- Fewer funds means lower total cost and simpler management
- Simple portfolios are easier to maintain and rebalance
The Classic Australian Three-Fund Portfolio
| Fund | ETF | Role | MER |
|---|---|---|---|
| Australian shares | VAS (or A200) | Domestic equity; franked dividends; AUD-denominated | 0.07% (0.04% A200) |
| International shares | VGS (or IWLD) | Global equity; diversification beyond Australia | 0.18% (0.09% IWLD) |
| Australian bonds | VAF (or VGB) | Defensive; interest income; portfolio stabiliser | 0.20% |
Total blended MER (at 40/40/20 allocation): approximately 0.12–0.15%/year — exceptionally low.
Choosing Your Allocation
The three-fund portfolio allows you to dial in your preferred risk level by adjusting the bond allocation:
| Risk profile | Australian shares | International shares | Bonds | Expected volatility |
|---|---|---|---|---|
| Conservative | 20% | 20% | 60% | Low |
| Moderate | 30% | 30% | 40% | Medium |
| Balanced | 35% | 35% | 30% | Medium |
| Growth | 40% | 45% | 15% | Medium–high |
| High Growth | 45% | 50% | 5% | High |
The Australian vs international shares split is a personal preference. A 40/60 split (40% Australian, 60% international) is common — it tilts toward Australian shares for franking credit benefits while maintaining strong international diversification.
VAS vs A200 for Australian Shares
| ETF | Index | Holdings | MER | Notes |
|---|---|---|---|---|
| VAS | S&P/ASX 300 | ~300 companies | 0.07% | Standard choice; broad |
| A200 | S&P/ASX 200 | 200 companies | 0.04% | Cheaper; fewer small caps |
Both are excellent. A200’s lower MER (0.04% vs 0.07%) saves $30/year per $100,000 invested. Difference in performance has been minimal historically.
VGS vs IWLD for International Shares
| ETF | Index | Holdings | MER | Notes |
|---|---|---|---|---|
| VGS | MSCI World ex-Australia | ~1,500 companies | 0.18% | Original; well-established |
| IWLD | MSCI World | ~1,600 companies | 0.09% | Includes tiny Australia weight; cheaper |
IWLD’s 0.09% MER vs VGS’s 0.18% is a meaningful difference — $90/year per $100,000. IWLD includes a small Australia allocation (excluded from VGS) — minor consideration.
VAF vs VGB for Bonds
| ETF | Index | Focus | MER |
|---|---|---|---|
| VAF | Bloomberg AusBond Composite | Australian government + corporate bonds | 0.20% |
| VGB | Bloomberg AusBond Government | Australian government bonds only | 0.20% |
VGB holds only government bonds (lower credit risk); VAF includes corporate bonds (slightly higher yield, slightly higher credit risk). Both are appropriate for the defensive portfolio component.
Running the Three-Fund Portfolio
Setting up:
- Open a brokerage account (SelfWealth, Pearler, CommSec, Nabtrade)
- Decide your target allocation (e.g., 40% VAS / 45% VGS / 15% VAF)
- Buy each ETF to establish your target weights
- Set up dividend reinvestment (DRP) or collect cash distributions
Maintaining:
- Invest new contributions into the underweight ETF(s) to maintain target allocations
- Review allocations annually; rebalance if any ETF is more than 5–10% off target
- The portfolio essentially manages itself — no stock selection, no market timing
Three-Fund Portfolio vs All-in-One ETF
An alternative to building your own three-fund portfolio is a single diversified ETF:
- VDHG (Vanguard Diversified High Growth): 90% growth / 10% defensive — seven underlying funds, 0.27% MER
- VDGR (Vanguard Diversified Growth): 70% growth / 30% defensive, 0.27% MER
The all-in-one ETF is simpler (one purchase) but slightly more expensive (0.27% vs ~0.12% for DIY). For true beginners, the simplicity may be worth the small additional cost.
Related Articles
- Two ETF Portfolio Australia
- Asset Allocation Australia
- Portfolio Rebalancing Australia
- Portfolio Fees Australia
- Portfolio hub
Frequently Asked Questions
Is a three-fund portfolio enough for Australian investors? Yes — two to three ETFs covering Australian shares, international shares, and bonds provide all the diversification needed for the vast majority of Australian investors. More funds rarely add meaningful benefit and increase complexity.
What are the best three ETFs for an Australian portfolio? A popular combination is VAS (Australian shares) + VGS (international shares) + VAF (bonds) at allocations suited to your risk tolerance. Lower-cost alternatives include A200 + IWLD + VAF or VGB. General information only — the right combination depends on your specific goals.
Do I need bonds in a three-fund portfolio if I’m young? Not necessarily — many young investors with 20+ year horizons choose a two-fund portfolio (just Australian + international shares) and skip bonds entirely. Bonds are most valuable when you need portfolio stability and income, or when your time horizon shortens. Including even 10% bonds does reduce volatility during market falls.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.