The Three-Fund Portfolio in Australia

🧩 What is a three-fund portfolio?🔗

The idea is beautifully simple. You hold three funds: one for Australian shares, one for international shares, and one for bonds. Nothing more.

The concept traces back to Jack Bogle, the founder of Vanguard in the US. His argument was straightforward: most active fund managers underperform a simple index over the long run, so why not just buy the whole market cheaply? The original US three-fund portfolio used a US total market fund, an international fund, and a US bond fund.

🎯 The essential: The Australian version swaps those US funds for ASX-listed ETFs. The logic is identical. You get exposure to thousands of companies and bonds across dozens of countries, all for a fraction of the cost of a managed fund. Three funds, low cost, low maintenance.

🇦🇺 The Australian version🔗

A popular Australian version of the three-fund portfolio uses these three ETFs as a starting point:

These are illustrative examples only, not recommendations. Other ETFs can fill each role just as well. For Australian shares, A200 (BetaShares Australia 200 ETF) is a common alternative. For global shares, BGBL (BetaShares Global Shares ETF) is another option. For bonds, VGB (Vanguard Australian Government Bond Index ETF) covers government bonds only if you prefer that. Fees are sourced from the Vanguard ETFs at a Glance document (June 2026) and are subject to change; always verify in the current PDS before investing.

Our VAS ETF guide and VGS ETF guide dig deeper into what each fund actually holds.

🎯 Why three funds?🔗

One fund is tempting. Ten funds feels thorough. Three hits the sweet spot. Here is what you get with a simple ETF portfolio built from three funds:

• Australian shares exposure, and with it, franking credits that can reduce your tax bill.
• Global shares exposure, thousands of companies across the US, Europe, Japan and more, spreading your risk well beyond the ASX.
• Bonds, a defensive ballast that tends to hold its value, or even rise, when share markets fall, smoothing out the volatility.

The honest truth is that adding a fourth or fifth fund rarely adds meaningful diversification. It just adds complexity: overlapping holdings, more to track, more decisions at rebalancing time. If you have been wondering how many ETFs you should own, the answer for most people is fewer than you think.

🎚️ How to choose your split🔗

This is the one decision that actually matters. The three funds are straightforward; the split between them is where you need to think. There are three levers.

1. Home bias. Australia makes up roughly 2% of the global share market by weight, so a purely market-weight portfolio would hold 2% Australian shares and 98% international. Most Australian investors hold far more at home, and the big reason is franking credits. Australian companies pay dividends with attached tax credits that can reduce your tax bill or generate a refund, and international shares do not carry them. A 30 to 40% allocation to Australian shares is common among DIY investors here.

2. Growth versus defensive. Shares are growth assets. Bonds are defensive. More bonds means a smoother ride but lower expected long-run returns. More shares means more potential growth but bigger swings. There is no objectively correct answer; it depends on how you would actually react if your portfolio dropped 30% in a year.

3. Age and risk tolerance. A common rule of thumb is to hold your age as a percentage in bonds, so a 30-year-old might hold 30% bonds. A slightly more growth-oriented version is age minus 10 in bonds. This is a starting point, not financial advice.

These are illustrative examples only. Your right split depends on your personal circumstances.

🥊 Three funds vs an all-in-one fund🔗

If you have looked into simple ETF investing in Australia, you have probably come across VDHG. The Vanguard Diversified High Growth ETF is a single fund that holds a diversified mix of shares and bonds internally. One ticker, done. So why bother with three funds at all?

The verdict: if you want maximum simplicity and you are happy with VDHG's fixed allocation, an all-in-one fund is genuinely hard to beat. If you want a lower cost and more control over your split, especially if you want more or less in bonds than VDHG offers, three funds is worth the small extra effort. Our VDHG guide has a full breakdown.

🛠️ How to build it, step by step🔗

This is more straightforward than it sounds.

1. Open a brokerage account. Look for a CHESS-sponsored broker, which means your shares are registered in your name, not held by the broker. Compare brokerage fees and platform features before you choose.
2. Decide your split. Use the illustrative mixes above as a starting point. Think honestly about your time horizon and how you would handle a significant market drop.
3. Buy your three ETFs in your chosen proportions. Investing $10,000 at a 30/50/20 split would be $3,000 into VAS, $5,000 into VGS, and $2,000 into VAF. These are illustrative amounts only.
4. Set up regular contributions. Dollar-cost averaging, investing a fixed amount at regular intervals, takes the guesswork out of timing. Monthly or quarterly works well for most people.
5. Rebalance once or twice a year. Over time your allocation drifts as different assets grow at different rates. Our guide on how to rebalance your ETF portfolio walks through exactly how.

That is genuinely it. The whole system takes maybe an hour to set up and a couple of hours a year to maintain.

🧾 Tax and franking credits🔗

Tax is not the most exciting topic, but it is worth a quick look.

Franking credits from VAS. Australian companies pay corporate tax before distributing dividends, and VAS passes those franking credits through to you. Depending on your tax rate, this can reduce your tax bill or generate a refund. It is one of the main reasons Australian investors tend to hold more domestic shares than their global market weight would suggest.

VGS and international shares. International shares do not carry Australian franking credits. Distributions from VGS are still taxable income, but there is no franking credit attached.

VAF and bond income. Distributions from VAF are taxed as ordinary income at your marginal tax rate. Bonds do not get the same tax treatment as share dividends.

Capital gains tax. When you sell ETF units for a profit, CGT applies. If you have held the units for more than 12 months, you are generally eligible for the 50% CGT discount. This is a reason many investors prefer to rebalance by directing new contributions rather than selling. Everyone's situation is different, so a registered tax agent or accountant can tell you exactly how these rules apply to you.

❓ Frequently asked questions🔗