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10 passive funds for your Isa

Taha Lokhandwala highlights 10 cost-effective ways to invest your Isa
February 28, 2019

Passive funds can be a good option for individual savings accounts (Isas) because passive investing is particularly suited to the long term. Nowadays there is a wide range of passive products and strategies available to investors, not just simple index-tracking open-ended funds. Exchange traded funds (ETFs) provide access to many asset classes via different investment styles. And as technology and artificial intelligence change the way indices are constructed, passive funds increasingly provide investors with a flexible way to invest at a low cost.

Below are 10 passive funds that follow a range of strategies that could help your Isa to grow, provide income or diversification, and mitigate downside.

 

EQUITY GROWTH

HSBC MSCI World UCITS ETF (HMWO)

The core part of a growth portfolio should include exposure to global equity markets, investing in the largest and some of the fastest growing companies. This ETF tracks MSCI World index, the flagship benchmark for global equities, which is market-cap weighted. This means its largest components are the largest stocks listed on developed markets, including the US, UK, Japan, Hong Kong, Germany and France.

HSBC MSCI World UCITS ETF has an ongoing charge of 0.15 per cent, making it one of the most cost-effective ways to get exposure to this index. It is not the largest ETF tracking this index, but is liquid and large enough to have a favourable bid/offer spread – the difference between the price at which you can buy a share and the price at which you can sell a share.

This ETF physically replicates the performance of MSCI World index by holding the stocks best placed to mimic its movements. It holds about 1,229 stocks. Since launch in January 2011, the ETF has made a total return of 133 per cent versus 136 per cent for MSCI World index. ETFs are likely to underperform 

 

 

L&G US Index Trust (GB00BG0QPL51)

Since the financial crisis, the US equity market has consistently performed well for reasons including its growing economy and booming tech sector. US equity valuations are considered to be high, but equity growth portfolios should still have an allocation to them. The US is also a region where active managers consistently fail to outperform the main indices such as the S&P 500, so in this area paying more for active management is less likely to add value.

L&G US Index Trust tracks the FTSE USA index and has an ongoing charge of only 0.06 per cent, making it one of the cheapest funds offering exposure to the US. The FTSE USA index is less well known than the S&P 500, but has outperformed that index over five years, rising 114 per cent versus 94 per cent. L&G US Index Trust has made a return of 111 per cent over this period. Its provider, Legal & General Investment Management, has offered passive funds for over 25 years.

 

INCOME

SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)

Investors should diversify their sources of income, and a simple way to do this is a global equity income ETF. This ETF tracks the S&P Global Dividend Aristocrats index, which isn’t weighted to stocks according to their market cap. Rather, it is composed of stocks that have demonstrated stable and rising income over time.

Ben Seager-Scott, chief investment strategist at wealth manager Tilney, says: “The focus is on income that is both stable and has been shown to rise over time, rather than high yields that may not be sustainable and are less likely to provide attractive total returns over the long term.”

SPDR S&P Global Dividend Aristocrats UCITS ETF has 100 holdings and a distribution yield of 3.8 per cent, higher than MSCI All Country World index’s 2.6 per cent yield. However, the ETF’s total returns have underperformed those of MSCI AC World index.

SPDR S&P Global Dividend Aristocrats UCITS ETF has an ongoing charge of 0.45 per cent.

 

BMO Barclays Global High Yield Bond UCITS ETF GBP Hedged (ZHYG)

High-yield bonds, as their name implies, can offer better levels of income than other bonds. But they are higher risk in that they are considered to be more likely to default. BMO Barclays Global High Yield Bond UCITS ETF balances these risks by tracking companies that are liquid, pay a good coupon and offer the potential for capital growth.

Peter Sleep, senior investment manager at Seven Investment Management, says: “In price volatility terms, high-yield bonds sit somewhere between [higher rated corporate bonds and equities] so hold on to your hat. However, if you can withstand the volatility this ETF has a 12-month yield of 4.9 per cent.”

BMO Barclays Global High Yield Bond UCITS ETF has an ongoing charge of 0.35 per cent.

 

 

BONDS

iShares Global Aggregate Bond UCITS ETF (SAGG)

iShares Global Aggregate Bond UCITS ETF is less than two years old, but has already amassed assets worth over £1.3bn. It provides investors with the cheapest and broadest exposure to the world’s bond markets by tracking the Bloomberg Barclays Global Aggregate index.

This index has an “eye watering” number of holdings, according to Mr Sleep, who adds: “It has a little bit of everything from major bond markets, but with an emphasis on higher quality government bonds.”

The ETF has about 45 per cent of its assets in dollar-denominated debt and 24 per cent in euro-denominated debt. Over 55 per cent is in AA or AAA-rated debt. The ETF’s size and volume means it has a very low bid/offer spread, helping to minimise costs, and it has an ongoing charge of 0.1 per cent. Since launch in November 2017 iShares Global Aggregate Bond UCITS ETF has made a total return of 2.83 per cent, close to the 2.89 per cent rise in this index over the same period.

 

Lyxor Core FTSE Actuaries UK Gilts 0-5Y UCITS ETF (GIL5)

Government bonds were considered to be a safe-haven asset for decades, but their benefit is now questionable. Passive exposure to mainstream government bond indices means exposure to interest rate risk, and the potential for capital losses as interest rates rise. But government bonds offer diversification from equities and can rise in value as equities fall.

Lyxor Core FTSE Actuaries UK Gilts 0-5Y UCITS ETF provides exposure to government bonds with low interest rate risk. It tracks the FTSE Actuaries UK Conventional Gilts Up To 5 Years index, which is composed of bonds with maturities below five years. The longer the time until a bond matures, the more likely it is to lose capital value if interest rates go up.

Lyxor Core FTSE Actuaries UK Gilts 0-5Y UCITS ETF launched in August 2016 and now has £150m in assets under management. It trades at reasonable bid/offer spreads, so the costs of trading it are palatable. And with an ongoing charge of 0.07 per cent, it offers excellent value for money.

 

SMART BETA

Vanguard Global Value Factor UCITS ETF (VVAL)

Smart-beta ETFs weight stocks using algorithms to follow market factors such as momentum and low volatility, or investment styles such as value or quality. This is instead of tracking indices weighted to their components according to market cap. Vanguard Global Value Factor UCITS ETF uses quantitative analysis to pick and weight stocks based on their valuation, considering price-to-book, price-to-earnings and estimated future earnings.

The ETF is benchmarked against the FTSE Developed All Cap index, but it does not aim to replicate its returns. Vanguard says it should instead be compared with actively managed funds. Since launch in December 2015, this ETF has made a total return of 55 per cent, in line with FTSE Developed All Cap index and slightly below MSCI AC World index’s 56 per cent return. However, Vanguard Global Value Factor UCITS ETF should outperform when value investing comes back into fashion. It has an ongoing charge of 0.22 per cent, decent trading liquidity and a narrow bid/offer spread.

 

FP Henderson Rowe FTSE RAFI Emerging Markets (GB00B4TW6408)

This open-ended fund tracks FTSE RAFI Emerging Markets index, which is composed of large emerging market stocks. The index is weighted to its components according to book value, cash flow, sales and dividends, giving it a strong value tilt. Its manager, Graham Foster, can invest in stocks that provide similar “economic exposure” to stocks in the index, although it is still essentially a passive fund.

Mr Sleep says: “The stock market can sometimes overvalue or undervalue a stock, and this strategy looks at a company’s economic footprint to try to single out the overhyped stocks and pick out the gems.”

This fund’s value and fundamental tilt means it has not outperformed major emerging markets indices due to a lack of technology exposure, but it could prove to be a worthwhile long-term holding when value returns to form. FP Henderson Rowe FTSE RAFI Emerging Markets Fund has an ongoing charge of 0.55 per cent and holds 332 stocks.

 

COMMODITIES

Invesco Physical Gold ETC (SGLD)

Gold can be a useful diversifier in a portfolio – particularly in times of volatility – and a good hedge against inflation. This precious metal retains its value well and generally rises in value during bear markets.

Invesco Physical Gold ETC tracks the performance of the London Gold Market fixing price by holding physical gold bullion. Mr Sleep says: “This exchange traded commodity (ETC) is something to consider if you think the world is doomed. It does not provide income, but might make capital gains, particularly if the US dollar is weak.”

Invesco Physical Gold ETC provides investors with certificates of ownership, which are very easy to trade and have a tight bid/offer spread. The ETC has closely tracked the price of gold and has an ongoing charge of 0.24 per cent.

 

Invesco Bloomberg Commodity UCITS ETF (CMOD)

Commodity prices can be volatile, but now that they have been through a China-induced bear market there are arguments for reallocating to them. Commodities can provide diversification in an equity-focused portfolio and a natural hedge against inflation.

Invesco Bloomberg Commodity UCITS ETF tracks the Bloomberg Commodities index, which has exposure to the prices of 20 commodities. It is weighted to each one according to its economic significance and market liquidity.

The ETF tracks this index synthetically using derivatives to replicate its returns, rather than physically holding commodities. It has tracked the index well, and is the largest and most liquid ETF of this type. Invesco Bloomberg Commodity UCITS ETF has an ongoing charge of 0.19 per cent and a swap fee for its use of derivatives of0.15 per cent.

 

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