The three-fund portfolio: how to build it in Spain with index funds

The three-fund portfolio is one of the most popular ideas among index investors. It was spread by the Bogleheads community, followers of Vanguard founder John Bogle, and its appeal is precisely its simplicity: with just three cheap funds you own thousands of companies and bonds worldwide, with almost nothing left to decide.

The three ingredients

The original version is very American (US stocks, international stocks and US bonds). For a euro investor, this adaptation makes more sense:

1. Developed-market equities (MSCI World index): about 1,400 large and mid-sized companies across 23 countries. This is the growth engine.
2. Emerging-market equities (MSCI Emerging Markets): China, India, Taiwan, Brazil... It completes the global picture and adds diversification.
3. Global bonds hedged to euros (Bloomberg Global Aggregate): the shock absorber. It is not there to grow, but to make drops hurt less and give you something to draw on when you rebalance.

An example with real funds

Using index funds from our catalog, one possible version would be:

Block	Fund	ISIN	TER
Developed	Vanguard Global Stock Index	IE00B03HD191	0.18%
Emerging	Vanguard Emerging Markets Stock Index	IE0031786142	0.23%
Bonds	Vanguard Global Bond Index EUR-H	IE00B18GC888	0.15%

It is not the only option, nor necessarily the cheapest: there are iShares, Amundi or Fidelity alternatives for each block, and you can browse them by category in the fund catalog or in the list of cheapest index funds. What matters is the index each one tracks, not the brand.

Which percentages to choose?

The real decision is not which funds, but how much equity versus bonds. Within equities, emerging markets make up around 10%–12% of the world market, which is a neutral reference. Three examples:

Profile	Developed	Emerging	Bonds	Weighted TER
Growth (20+ years)	80%	10%	10%	0.18%
Balanced	60%	10%	30%	0.18%
Conservative	40%	5%	55%	0.17%

The longer your horizon and the calmer you stay watching your portfolio fall 30%, the more equity you can hold. An honest tip: pick the percentage at which you would not sell in the worst drop you can imagine, not the one that maximises expected return.

The Spanish advantage: rebalancing without paying tax

Over time, whatever rises most ends up overweight and your portfolio drifts from its chosen percentages. Rebalancing means putting it back, selling some of what has risen to buy what has lagged.

In Spain, if you do it with mutual funds (not ETFs), a fund-to-fund transfer is not taxed: you move money from the developed-markets fund to the bond fund without paying a euro of income tax until you eventually redeem. With ETFs, every sale to rebalance is a capital gain to declare. That is why, for this portfolio, index funds are usually a better vehicle than ETFs in Spain. We cover it in depth in ETF vs. index fund.

Another way to rebalance without selling anything: direct new contributions to whichever fund has fallen below its weight. For most people who invest monthly, that is enough. There are more methods in how to rebalance your portfolio.

Why not a single fund?

There is an even simpler version: a single MSCI ACWI fund (developed + emerging) or even a balanced fund that holds everything. It is a perfectly valid option. The three-fund portfolio gives you, for a bit more work, control over each block's weight and the ability to adjust bonds with age without changing product.

In short

• Three funds — developed, emerging and bonds — are enough to invest worldwide for under 0.2% a year.
• The important decision is the equity/bond split, not the fund house.
• In Spain, funds let you rebalance through tax-free transfers; ETFs do not.
• Review the weights once a year and use contributions to correct drift.

Educational content, not an investment recommendation. The funds named are examples from the catalog; check the current TER and terms in their official documentation before investing.