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Smart and sassy new ETFs for 2015

We look at some of the more interesting exchange-traded funds launched so far this year
October 8, 2015

The exchange-traded funds (ETF) market has continued to develop in 2015, with many providers creating innovative new low-cost products. Some of the new listings are useful tools that self-directed investors can harness to improve their portfolios. We look at six of the most interesting ETFs listed on the London Stock Exchange this year. These offer UK retail investors access to a range of new indices, low-cost investments and new market themes.

 

Amundi ETF S&P 500 Buyback UCITs ETF USD (BYBG)

Share buybacks have been a growing trend in the US, with companies using the low rate environment to return value to shareholders and Amundi has tapped into the theme with this ETF.

ETFs can be a good way of diversifying exposure to a popular index by homing in on a trend or theme. The share buyback theme in the US is a good way of tapping into companies whose share price could be on the rise following the announcement of a buyback. Stocks tend to outperform after an announcement and data has shown they can continue to see their share prices surge for several years afterwards. In the past year US companies have been on a buyback binge, with Apple reducing its share count by 4.7 per cent year on year in 2015.

Amundi's ETF offers exposure to this trend via the S&P 500 Buyback index. It assesses the performance of the top 100 stocks in the S&P 500 index with the highest buyback ratio over 12 months, and equally weights the components in order to rule out any bias to the larger stocks.

The ETF is one of the few listed in the UK offering exposure to this idea. PowerShares launched a global Buyback Achievers ETF at the end of last year, which offers exposure to stocks from the Nasdaq US Buyback Achievers and Nasdaq International Buyback Achievers indices. iShares has also launched an ETF tracking the Nasdaq US Buyback Achievers index but Amundi was the first in Europe to launch this ETF tracking the S&P 500 Buyback, providing diversification to one of the most popular stock indices in the US.

It aims to give investors access to companies that are improving per-share measures of profitability and cash flow, such as earnings per share and cash flow per share. Companies it invests in include Motorola Solutions, Coca-Cola Enterprises and Intel, and it covers a wide range of sectors across its 100 holdings.

 

db x-trackers FTSE 100 Equal Weight ETF (DR) (XFEW)

Smart beta products, which aim to group together stocks by characteristics rather than their market capitalisation, are booming and there are plenty to choose from for retail investors. But complex products don't guarantee better returns.

This db x-trackers ETF uses one of the most straightforward and compelling smart beta tactics and was the first listed in the UK to give investors access to the equal-weighted FTSE 100 index. By giving the same exposure to every stock in the FTSE 100 rather than concentrating exposure to the very large companies, the index gives investors diversification as well as the chance to avoid concentration in overvalued UK blue-chips. Removing the large-cap bias in the FTSE 100, where the top five stocks make up 22.7 per cent of all holdings, means there is less chance of funnelling all your investment into companies with inflated stock prices. There is also data to suggest that small-cap stocks outperform in the long term.

The provider claims that on back-tested data between December 2004 and May 2015 an equal-weighted version of the FTSE 100 would have outperformed the standard market cap version of the index by 2.6 per cent a year.

It is a physical ETF, so it buys the securities it invests in and does not engage in securities lending, making it one of the most straightforward and easy to comprehend ETF structures. It also pays out an income and is very low cost, with an ongoing charge of 0.25 per cent. For a good way to add diversification to your portfolio in terms of market cap and potentially improve on the risk-adjusted return of the largest companies on the London Stock Exchange, this is a great option.

 

db x-trackers JPX-Nikkei 400 UCITS ETF GBP hedged (DR) (XDNG) and Lyxor UCITS ETF JPX-Nikkei 400 GBP Hedged (JPXX)

These ETFs win a joint spot as the two currency-hedged products to track the recently launched JPX-Nikkei 400. This is a new index tapping into Japan's burgeoning interest in corporate governance and shareholder returns, and companies have been fighting to gain entry to it.

The JPX-Nikkei 400 was launched in 2014 to showcase the nation's most profitable, shareholder-friendly companies. Companies only make it into the index if they meet stringent criteria, including return on equity, operating profit and market value. It means that investors end up with stocks with strong balance sheets and a focus on delivering strong returns to shareholders whose share prices should appreciate as a result.

Deutsche Bank's ETF was the first directly replicating ETF to offer a sterling-hedged version of the index, which has been crucial for protecting investors' returns from being ravaged by the weak yen this year. It is still the only physically replicating ETF offering this index, but Lyxor's ETF, also launched this year, is slightly cheaper, with an ongoing charge of 0.25 per cent, and also hedges returns back to sterling.

Focus on corporate governance in Japan only looks set to increase in the near future as it forms the centre point of prime minister Shinzo Abe's 'third arrow' of economic reforms. His package of fiscal stimulus has so far included a mammoth quantitative easing programme, resulting in a devaluation of the currency and boost to equities. The focus on shareholder returns is the latest step, culminating in a Stewardship Code and Corporate Governance Code.

Although there is a wealth of ETFs in this area, Deutsche Bank and Lyxor are the only providers offering sterling-hedged versions, which will prove valuable if the yen continues to weaken throughout the year.

 

 

iShares UK Target Real Estate (UKRE)

The iShares UK Target Real Estate ETF was launched to offer highly liquid exposure to a typically illiquid asset, but also to reduce the risks and volatility associated with ETF investing in property. Real estate has been one of the hottest areas of investment in recent months, with its certainty of income and low-risk profile a lure for yield-hungry investors. As a result, most funds investing in real estate are expensive or trade at high premiums and ETFs can offer a cost-effective way of tracking similar assets.

The major benefit of investing in property via ETFs is that you get income and lower risk than through equity investing, but because ETFs invest in real-estate investment trusts (Reits) rather than direct property assets, they tend to correlate more with equities than if you were invested in property assets.

That is a downside for investors seeking uncorrelated returns, and something BlackRock has tried to iron out with the Target real-estate ETF. The fund invests in Reits, but gives larger exposure to less volatile stocks within its index. That means that it is one of the only real-estate ETFs designed to offer a lower risk of capital loss than others tracking the comparative core real-estate index. As well as targeting lower volatility Reits, the index also analyses Reit balance sheets in order to calculate their average proportion of debt. It also allocates to inflation-linked government bonds in order to reduce leverage and provide some protection against inflation, another benefit of physical real estate.

The ETF gives investors access to a broad mixture of property types, including retail, office and healthcare Reits across 27 holdings. Retail Reits make up almost 12 per cent of the portfolio while office Reits account for just over 10 per cent and industrial Reits 4.9 per cent.

ETFs investing in real estate are growing in popularity due to their combination of income and yield at a lower cost than active funds or Reits. Although property ETFs behave more like equities than real estate assets, they are also much cheaper - the iShares ETF has a price tag of 0.4 per cent compared with double-digit premiums on investment trusts. It is also physically replicating.

 

UBS Barclays MSCI US Liquid Corporate Sustainable UCITS ETF (UC98)

There remains very little choice in ETFs focused on companies with good social, environmental and governance (ESG) records, particularly in the world of fixed income. Before the launch of UBS's US corporate-focused ethical ETF, investors had no way of investing only in the bonds of companies meeting ethical criteria. The provider became the first in the world to launch an ESG fixed-income ETF when it listed UBS Barclays MSCI US Liquid Corporate Sustainable UCITS ETF (UC98) on the London Stock Exchange this year.

The ETF is solely invested in US companies awarded an MSCI environmental, social and governance ('ESG') rating of BBB or higher and physically tracks a range of bonds, which must also meet other quality criteria. That means it includes bonds that do not meet credit quality, liquidity and maturity standards as well as social and environmental criteria.

The index was produced by MSCI, which already has a range of ESG indices but previously no fixed-income capacity, and Barclays, an experienced provider of fixed-income indices. Companies are included that have signed up to ESG commitments such as the UN principles for responsible investing (PRI) and are screened for the kinds of business activities they engage in as well as the amount of information they disclose to investors.

It is physically replicating and comes with a low ongoing charge of just 0.2 per cent and also pays a dividend. Bonds include those issued by pharma giant Gilead Sciences and software company Cisco Systems. The largest weighting is to bonds with a maturity of between three and five years and seven to 10 years, making it a reasonably balanced maturity profile.

Investors are also guaranteed exposure to investment-grade credit and each bond is limited to a capitalisation of 5 per cent of the total market value, limiting the risk in the portfolio.