Investors Chronicle’s Top 50 exchange traded funds (ETFs) list is in its fourth year. Our selection of core portfolio building blocks was launched in 2014, and each year we seek out the best value ETFs on the market to come up with a mix of long-term core buy-and-hold strategies, and more innovative ETFs that we think could generate extra returns for your portfolio.
This year we have made 24 changes to our 2016 selection, taking advantage of cuts to ongoing charges, new launches and changes in size or liquidity, and have created two new categories. We have maintained a focus on areas such as the US, where active managers usually fail to add value, and added a selection of higher-yielding funds for investors seeking income in today’s low-yield market.
To come up with our final list we have weighed up metrics including liquidity, fund size, trading costs, total returns and tracking difference, as well as headline fees. We have also consulted a panel of experts in order to debate the best markets to use ETFs in and the best benchmarks to use in those areas.
This year our panel consists of:
■ Hortense Bioy, analyst at Morningstar
■ Alan Miller, founder of SCM Direct
■ James McManus, analyst at Nutmeg
■ Oliver Smith, portfolio manager at IG
■ Lynn Hutchinson, assistant director at Charles Stanley Pan Asset
■ Irene Bauer, chief investment officer at Twenty20 Investments
■ Ben Seager-Scott, chief investment strategist at Tilney Group
■ David Liddell, chief executive at IpsoFacto Investor
■ Paul Taylor, managing director at McCarthy Taylor
We started by analysing the performance and tracking record of our 2016 list. Then we asked our panel a) to review the spread of categories and recommend any to be expanded, added or dropped and b) to consider the best indices to track in those categories and recommend specific ETFs for those categories. We then crunched Morningstar data on the entire London-listed ETF universe to find the best ETFs based on fund size, liquidity (defined by average daily trading volumes), ongoing charge, tracking difference and total returns from a range of broad categories.
The ETFs we choose are designed to be the best value options, while taking account of various factors. For example, the cheapest ETF on an ongoing charge basis is not necessarily the cheapest when trading costs are considered. An ETF with very low trading volumes and a wide bid-offer spread will end up hurting your returns, even if it looks tempting on an ongoing charge basis.
The list is not designed as a buy list, but as a starting point for cheap-and-easy access to these markets and sectors and our decision to drop an ETF from the selection does not mean we no longer think it worth owning. Many of the changes we have made for 2017 reflect cuts to ongoing charges, new ETF launches and changes to ETF liquidity and size. Other changes have been made to reflect our current views on which benchmarks and markets are the best to track.
In many cases the decision has been taken in order to prioritise a different strategy or style or include broader market ETFs. Generally, we lean towards the most straightforward fund structures and tend to prioritise physically replicating ETFs where possible.
