Our pick of the passive funds for an Isa portfolio
Kate Beioley reveals our updated selection of 50 core building-block ETFs for use in all types of portfolios
The Investors Chronicle Top 50 ETF list is now in its third year. In 2014 we launched the list as a selection of core long-term building blocks for your portfolio. This year our selection has been tailored to maximise the benefit of passive funds in areas where active managers struggle and to take advantage of new innovation in ETFs, while remaining focused on long-term buy-and-hold strategies. We have homed in on the US and made full use of new launches and cuts in ongoing charges, making 21 changes to 2015's selection and cutting two categories to end up with our final top 50 list.
Last year we turned to a panel of experts for the first time in order to fine tune our selection and this year we have used a similar process, combining data and qualitative expert input. This year's larger panel is made up of:
■ Shaun Port, chief investment officer at Nutmeg
■ Lynn Hutchinson, assistant director at Charles Stanley Pan Asset
■ Adam Laird, passive investment manager at Hargreaves Lansdown
■ Alan Miller, chief investment officer and founder of SCM Direct
■ Ben Seager-Scott, director, investment strategy at TilneyBestinvest
■ Paul Taylor, chief executive officer at McCarthy Taylor
■ David Liddell, chief executive at IpsoFacto investor.com
■ Marco Aboav, macro portfolio manager at MoneyFarm
■ Irene Bauer, partner at Twenty20 Investments
Starting out with our 2015 list we asked our panel a) to review the spread of categories and recommend any to be added or dropped and b) to consider the best indices for each category and recommend specific ETFs for those. We then analysed data on a wide range of ETFs tracking our chosen indices in order to isolate liquid, low-cost ETFs with the lowest tracking error and trading costs.
FE Trustnet provided us with fund size, tracking difference (the difference in ETF returns against benchmark) and ongoing charge data, as well as figures for tracking error (the volatility of ETF returns against the benchmark) across a wide range of funds. We have also taken into account the many articles we have written this year on a wide range of ETF topics and studied ETF data from FE Trustnet, Morningstar and Bloomberg.
Deciding on the final list was a delicate balance. It is important not to give too much weight to any one metric - for example the ETF with the lowest ongoing charge is not always cheapest and there is sometimes a good reason for poor tracking over a certain timeframe.
Oliver Clarke-Williams, head of FE Ratings, says: "Simply relying on quoted costs alone is not always indicative, as not all costs are always revealed by the funds, making comparisons difficult."
"Tracking error is a good indicator of how well a fund is tracking its respective index, but is not the be all and end all when looking at ETF performance. It's important to take tracking difference, cost and fund size into consideration."
This year we dropped the categories for private equity and property in order to focus on areas where passive ETFs really add value. Our panel felt that passive funds are excellent vehicles in highly efficient and expensive markets such as the US, whereas specialist areas such as private equity and property were areas in which active managers could add real value. ETFs tracking physical property indices also do not behave like physical property assets and so are not good diversifiers in the same way as bricks and mortar investments.
Last year we introduced currency hedging in several areas in order to minimise the impact of weakening foreign currencies on your returns. In many cases, the case for currency hedging is less clear than it was last year, when sterling was less volatile and with quantitative easing programmes weakening currencies in Japan and Europe. This year we have kept some hedged share classes, but for the most part have selected the most straightforward, sterling option. Bear in mind, however, that many ETFs are denominated in currencies other than sterling, which could have an impact on your returns.
For the full selection, viewable on desktop or tablet, click here.
For readers accessing this article on a mobile phone, click here for a mobile optimised version of the top 50 selection.
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