Investors are funnelling a record amount of money into exchange traded funds (ETFs) and they can be a great way to cheaply track an index. But are the most popular picks really attracting the smart money? Here's a look at five popular ETFs, two that are commonly held by clients of Barclays Stockbrokers and three that are most searched for on the Morningstar fund data website, and their less popular alternatives.
iShares FTSE 100 UCITS ETF (ISF)
This Dublin-domiciled ETF is the most commonly held by clients of the Barclays Stockbroking platform. It was the first product to be launched on the London Stock Exchange and it is one of the biggest ETFs in the UK. However it is let down by its price - it has a TER of 0.4 per cent which makes it the most expensive FTSE 100 ETF traded on the London Stock Exchange.
And the tracking difference on the iShares fund is a little larger than you might expect. Since inception on 27 April 2000, the index has returned 68.33 per cent but the fund has only managed 59.19. For this reason, Peter Sleep, ETF specialist at Seven Investment Management, prefers the Vanguard FTSE 100 ETF (VUKE). It doesn't have a very long track record, having only launched in May 2012, but its TER is just 0.10 per cent.
This was the world's first ETF and is also a bestseller with Barclays Stockbrokers. Morningstar describes the SPDR S&P 500 as a solid core equity holding because of its broad diversification across sectors and individual stocks, and low expense ratio. Despite the fact that it lacks exposure to small-cap stocks, it has had more than a 99 per cent correlation with the broader US market and a 90 per cent correlation to developed international stocks. But Mr Sleep says State Street's offering is a bad idea for anyone not investing through a Sipp or an Isa because it doesn't have UK reporting status. This means any capital gains you receive on selling the fund will be taxed as income.
He much prefers SPDR's UCITS version of the S&P ETF (SPX5), which is based in London and has a 0.15 per cent annual charge - almost twice the USD version. He also likes HSBC's S&P ETF (HSPX) - which has UK reporting status and a 0.09 per cent TER. For new investors, Adam Laird, head of passive investments at Hargreaves Lansdown, suggests a look at Vanguard's S&P 500 ETF (VUSA) instead.
The SPDR Gold Trust is the world's largest Gold ETC, but it is an American product and does not have a UK listing. This means that while it is possible to buy this through some UK brokers, as with the SPDR S&P USD ETF there can be tax disadvantages. So if you're looking for a UK-listed product, Source Physical Gold ETC (SGLD) is one of the cheapest products with a 0.29 per cent TER. It is one of the largest gold products listed in Europe, with over £1.2bn under management, making it very liquid, and therefore suitable for a long- or a short-term play. The fund won Best Exchange Traded Product for Gold Exposure at the IC Fund Awards 2013.
iShares Corporate Bond UCITS ETF (SLXX)
This ETF gets the analysts' seal of approval. It is a low-cost option (0.2 per cent TER) with a broad spread of bonds. It has a good track record, is very liquid and is available on platforms that deal in ETFs. It follows around 270 liquid UK investment-grade corporate bonds, following the Markit iBoxx GBP Liquid Corporates Large Cap Index.
Mr Laird also recommends the SPDR Barclays Sterling Corporate Bond UCITS ETF (UKCO). The TER is the same as iShares' offering but it tracks the Barclays Capital Sterling Corporate Index, which is broader than the Markit iBoxx index, meaning the fund holds around twice as many stocks.
Vanguard FTSE Emerging Markets ETF (VFEM)
This ETF gets the thumbs up from the analysts. It has tracked its index (FTSE Emerging markets) well and has a TER of 0.45 per cent, which is the cheapest available on the London Stock Exchange. However, some emerging markets investors prefer the MSCI index because it excludes Korea, which has been teetering on the verge of becoming a developed market for years. Investors looking to track the MSCI index could look at iShares MSCI Emerging Markets UCITS (IEEM).
And Mr Laird says that, because emerging markets can sometimes be difficult for managers to access, it can be beneficial for investors to use a synthetic ETF as they can give better tracking, meaning any risk in accessing the investments that make up the index is borne by the derivative provider instead of you. He suggests the Amundi ETF MSCI Emerging Markets (AEEM) if you are considering a synthetic version.
