Low-cost core passive building blocks

GROWTH

41 iShares Core FTSE 100 UCITS ETF (ISF)

Exposure to your home market is key and the FTSE 100 could be a good area for growth in coming years, having been hit by a global slowdown in recent months. Alan Miller, founder of SCM Direct, says: "This ETF invests in just the very largest UK stocks, many of which are in the beaten-up oil and gas and commodity sectors. UK large-caps have performed very poorly compared with their medium and smaller-sized peers, and are likely to outperform from here."

This ETF has an annual charge of just 0.07 per cent - the lowest fee of all FTSE 100 ETFs - and benefits from being incredibly liquid, with the typical difference between its buying and selling price just 0.04 per cent. It's a straightforward, physically replicating product with a very good record of tracking its index closely. It pays a quarterly dividend.

42 Vanguard S&P 500 UCITS ETF (VUSA)

The US is the largest stock market in the world so a vital region to have a core allocation to. It is also a notoriously difficult market for active managers to beat so it is one of the best regions to allocate to via a low-cost core passive fund. US ETFs are also among some of the cheapest passive funds - Vanguard S&P 500 has an ongoing charge of just 0.07 per cent.

Although growth expectations have been revised down since last year, the US remains a solid option for long-term equity performance. It was the only major economy to embark on an interest hike at the end of last year, in contrast to most countries, which have remained focused on loose monetary policy aimed at stimulating the frail global economy. There are headwinds to come: global volatility has spread to the US market in recent weeks and weak manufacturing is also a red flag. But the US is one of the largest and most liquid markets and home to some of best global companies, as well as being less cyclically vulnerable than markets such as the UK and Japan. Ben Seager-Scott, director of investment strategy at Tilney Bestinvest, says: "In global downturns US equities generally tend to fare well."

The S&P 500 index is the key barometer for the wider economy and a broadly diversified index, making it a good core holding. Vanguard S&P 500 is the lowest cost option for US equity exposure, and has demonstrated stable and consistent performance over time, having tracked the S&P 500 closely. It is also highly liquid and so generally trades with a tight bid-offer spread. Mr Seager-Scott says: "An ultra-low-cost S&P 500 tracker seems an eminently sensible approach for accessing the world's largest equity market."

INCOME

43 Vanguard FTSE UK Equity Income Index Fund (GB00B5B74684)

In an environment of record-low interest rates and yields, tracking down healthy income streams without major risks is tricky. But Vanguard FTSE UK Equity Income Index Fund is widely recommended as a low-cost route to the highest-yielding stocks in the FTSE 350, providing exposure to a diverse range of good UK dividend payers and avoiding concentration on just a few names.

The UK market is highly concentrated when it comes to dividend payers, with just five companies accounting for around one-third of dividends, several of which are under threat from potential cuts. Vanguard FTSE UK Equity Income Index reduces that concentration risk by limiting the percentage of exposure to any one company or industry. The fund is invested in 133 stocks and has a market cap of £39.9bn, with an equity yield of 4.7 per cent.

Gavin Haynes, managing director at Whitechurch Securities, says: "This fund provides a good core exposure to UK blue-chip yielding stocks through tracking the FTSE UK Equity Income Index. A historical yield of 4.8 per cent looks compelling, although it is important to be mindful of the risk of dividend cuts from index heavyweights."

Adrian Lowcock, head of investing at AXA Wealth, says: "As this fund has an income bias it is likely to favour certain sectors, such as pharmaceuticals and utilities. This may give the fund a more defensive feel compared with a broader UK index tracker."

44 BlackRock Corporate Bond Tracker Fund (GB00BKF2KH76)

The corporate bond sector is another place to find higher income than offered by low-yielding government bonds, albeit with higher risk. BlackRock's corporate bond tracker carries a yield of 3.17 per cent, as well as being diversified across a very wide range of investment-grade corporate bonds - it holds more than 1,000 securities. And at a size of over £1bn this fund is liquid.

BlackRock Corporate Bond Tracker is also a good core holding due to its wide spread of corporate, covered and quasi-sovereign issuers. The fund has an attractive yield due to its slightly higher interest rate risk - it has an effective duration of 7.74 years. But with rates likely to remain lower for longer this could be a risk worth taking in exchange for a good income stream.

The fund has more than 35 per cent of assets invested in BBB-rated debt and is very low cost: it is available on platforms for just 0.12 per cent a year. According to research company Morningstar, it does a good job of tracking its benchmark and even provides a small measure of alpha (outperformance over the index it tracks) at times as a result of cost efficiencies in trading.

WEALTH PRESERVATION

45 SPDR Barclays 0-5 Year Sterling Corporate Bond UCITS ETF (SUKC)

Markets have been choppy since the start of the year, a reminder to investors of the importance of including protective funds in portfolios. Government bonds were the most popular choice for this, but quantitative easing (QE) injections across the world have resulted in distorted and volatile bond markets. With that in mind, a mixture of short-dated bonds with low interest-rate risk is likely to be the best option.

SPDR Barclays 0-5 Year Sterling Corporate Bond is an investment-grade corporate bond ETF. Shaun Port, chief investment officer at Nutmeg, says: "There is no one ETF we would highlight as a pure play on wealth preservation, but the closest thing to a relatively steady way to return a bit more than cash over the longer term would be short-dated corporate bonds. Over the past 10 years the worst 12-month return for a portfolio of corporate bonds with less than five years to maturity would have been a loss of just under 3 per cent."

Mr Seager-Scott agrees that "reduced duration fixed-income exposure could provide some of the desired characteristics, and should limit sensitivity to changes in the interest rate and inflation outlook."

SPDR Barclays 0-5 Year Sterling Corporate Bond has an ongoing charge of 0.2 per cent and a low duration risk, although has only a short track record having been launched in 2014.

46 L&G Global Inflation Linked Bond Index Fund (GB00BG0QPP99)

L&G Global Inflation Linked Bond Index Fund tracks the Barclays World Government Ex UK Inflation Linked Bonds index, hedged back to sterling. Mr Haynes says: "This provides a good core defensive holding at a time when inflation expectations are very low."

The fund has a low ongoing charge of 0.17 per cent and has held up well in recent volatility, generating a positive return in the year to date against falls for many major indices.

DIVERSIFICATION

47 Source Physical Gold P-ETC (SGLP)

Investors often allocate to gold as an insurance asset against market mayhem as it generally behaves differently to other assets in a portfolio. Gold can act as a hedge against inflation and outperform when other markets are tanking. Unlike some exchange-traded commodities (ETCs), which track futures contracts, this fund is a physical exchange traded commodity (P-ETC), which holds real gold - it is secured against gold bullion held in JPMorgan Chase's London vaults. That means you can access gold without having to buy bars yourself or take a bet on volatile derivatives contracts.

That is not to say it is without volatility, but Mr Seager-Scott says: "With many asset classes now correlated in a way that perhaps was not the case several years ago, an investment such as physical gold - which still tends to have a low correlation to equity and bond markets - can be a good approach."

Heather Ferguson, investment analyst at Hargreaves Lansdown, says: "This option is cheaper and more liquid than many of its peers, although we would suggest an investment of this type makes up only a small portion of a portfolio."

48 iShares Global Water UCITS ETF (IH20)

There are obvious reasons for investing in water. After all, it is one of the most precious resources on earth and also happens to be fairly uncorrelated to the rest of the market.

iShares Global Water UCITS ETF has strongly outperformed in the long term and on a calendar year basis. Over five years the ETF has returned 66.7 per cent and returned double-digit positive returns every year since launch except in 2008, when it fell by 15 per cent compared with a FTSE 100 fall of more than 28 per cent. That also compares well with one of the other water ETF options - PowerShares Global Water UCITS ETF (PSHO) - which experienced drops in 2008, 2011, 2015 and 2016.

iShares Global Water tracks an index invested in the 50 largest companies globally involved in water-related business. The index is divided between regulated water utility companies and diverse industrial companies that have significant revenues generated from businesses related to water, and it has an ongoing charge of 0.65 per cent.

CONTRARIAN

49 BlackRock Emerging Markets Equity Tracker Fund (GB00BJL5BW59)

Emerging markets are feeling the pain at the moment, with slowing Chinese growth, plummeting oil prices and rising debt levels in several key economies, and investor sentiment towards this area is deteriorating.

But low valuations, young and growing populations, and the fact that several emerging economies are beneficiaries of the low oil price make for an interesting contrarian call. Mr Lowcock says: "Emerging markets are a contrarian call at present as investors remain risk averse and the outlook for global growth remains unclear. A tracker will give full exposure to emerging markets, including areas such as Brazil and Russia which have been sensitive to falls in commodity and oil prices."

Mr Haynes says: "Emerging markets have been badly beaten up, but despite economic headwinds many of these markets are trading on very cheap valuations. This fund aims to achieve capital growth by closely tracking the performance of the FTSE Emerging Index."

At 0.22 per cent this fund is a very low-cost way to access emerging markets.

50 ETFS GBP Daily Hedged Industrial Metals DJ-UBS PDSM ETC (PIMT)

For an extremely high-risk bet on one of the least-loved asset classes take a long-term bet on ETFS GBP Daily Hedged Industrial Metals, an ETC designed to provide exposure to commodity futures while offering a daily currency hedge back to Sterling.

Paul Taylor, chief executive officer of independent financial adviser McCarthy Taylor, likes this ETC and says: "Commodities have been badly mauled and prices have continued to struggle, but for the adventurous long-term investor they make an interesting contrarian call at these levels. Due to the nature of the sector, physical replication is not possible, so we have to accept a synthetic passive approach through the use of swaps in this instance. The payment obligations of the swap counterparties are protected by collateral, which is marked to market daily."

Fund charges and cumulative performance (%)

Source: FE Analytics, as at 25.02.16