UK EQUITIES (FOUR ETFs)
UK equities tend to be a core part and starting point for UK private investors, for two reasons. Home bias is an instinct even when investing, as it’s certainly more palatable to start buying funds and indices that house companies investors are familiar with. Whether this is right or not is a different debate, however, given most people invest to eventually use capital as income in sterling, holding a portion in UK equities makes perfect sense. The UK houses some of the world’s largest companies, benefiting from global economic growth and trade. Exposure to UK equities provides exposure to the UK economy, along with other developed and emerging markets.
UK equities (four ETFs)
UK equities tend to be a core part and starting point for UK private investors, for two reasons. Home bias is an instinct even when investing, as it’s certainly more palatable to buy funds and indices that house companies investors are familiar with. Whether this is right or not is a different debate; however, given most people invest to eventually use capital as income in sterling, holding a portion in UK equities makes perfect sense. The UK is home to some of the world’s largest companies, benefiting from global economic growth and trade. Exposure to UK equities provides exposure to the UK economy, along with other developed and emerging markets.
iShares Core FTSE 100 UCITS ETF (ISF)
This is a flagship product from iShares, the largest provider of ETFs in the UK, and remains a standout and firm favourite among our panel of experts. The FTSE 100 index provides investors with exposure to the largest UK-listed companies and makes a good starting point when building a growth portfolio. The fund has nore than £6.5bn in assets with around £4.4m shares being traded every day, making it one of the most liquid ETFs available. Oliver Smith says the ETF has one of the lowest total cost of ownerships around, given its low bid/offer spread and low 0.07 per cent ongoing charge. It also returns more than a rival Vanguard product due to iShares’ superior portfolio management, and additional returns from lending out its holdings to short sellers, known as securities lending. An effective and core ETF that’s value for money.
NEW: Lyxor Core Morningstar UK UCITS ETF (LCUK)
While ISF gives you exposure to the largest companies, this ETF from Lyxor buys the broader UK equity market, tracking the relatively unknown Morningstar UK index, which has around 330 stocks. The fund only launched in February last year, but surprised the market by charging only 0.04 per cent – making it the cheapest ETF around. This ETF is set up to rival those tracking the FTSE All-Share, and is priced so low by using a non-mainstream index (but which offers very similar exposure) and offering a simple product with no securities lending. This ETF is small, but liquidity and trading costs are reasonable and, given its ground-breaking price level, is expected to grow and could become a leading product in future. Lyxor is also rated by the panel for its portfolio management. The cheapest FTSE All-Share ETF is priced at 0.2 per cent, so LCUK’s substantially lower fee could really pay off for long-term investors.
SPDR FTSE UK All Share UCITS ETF (FTAL)
We considered replacing this FTSE All-Share ETF from SPDR with LCUK, but the expert panel was split on whether to do this. Investors still may prefer the familiarity of the FTSE index versus that offered by Morningstar, and this product is still the standout way to track the benchmark. Mr Smith says the FTSE All-Share is still a hugely relevant index for investors, and this product has over £500m in assets and a significant secondary market – making it cheap and easy to trade. It’s also priced competitively at 0.2 per cent, in line with other FTSE All-Share-tracking ETFs, and SPDR’s portfolio management is admired by the panel.
iShares UK Dividend UCITS ETF (IUKD)
This ETF was a new entrant in 2018 and, given how important UK equity income is for investors’ the decision to keep it in required thorough research. The panel was split over keeping this ETF or reverting to the SPDR S&P Dividend Aristocrats series, whose ETFs feature in different geographies in this report. However, we decided to stick with IUKD despite it being 0.1 percentage points more expensive than rival SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV). This decision comes mainly down to yield, with IUKD offering a yield of 6.58 per cent versus 4.09 per cent from UKDV. We appreciate the S&P Dividend Aristocrats methodology, which leans towards more sustainable and growing dividends, but IUKD’s yield is unrivalled and comes within an excellently managed ETF, at a fair price of 0.4 per cent, and with good liquidity and excellent trading costs.
US equities (three ETFs)
While UK equities provide investors with appropriate currency and growth exposure, the US is where the best returns have been in recent years. The world’s largest stock market should have a place in any growth portfolio, and investing in the US passively via ETFs is a popular thing to do. This is because the US equity market, being the most developed and most popular globally, is very efficient and active managers in general struggle to outperform their benchmark indices. We are entering a new phase of the market cycle, however, and so the returns of the past few years are unlikely to be replicated, and this has helped shaped this year’s chosen ETFs.
Dropped from 2018 selection:
iShares Edge MSCI USA Value Factor UCITS ETF (IUVF)
Investing in the value market factor – meaning a style of investing that outperforms the general market over the long term – has been a painful process. Some argue its time will come in the near future, but those arguments have been heard for a long, long time. We are removing this ETF because while it could still work as a strategy, investors shouldn’t pin everything on this, and at this stage in the cycle more important aspects should be considered. This ETF offers great value and is a strong ETF, but is being removed because the panel thought its place could be put to better use.
2019 selection:
iShares Core S&P 500 UCITS ETF (CSP1)
This core product from iShares received backing from all of the panel and is a standout ETF in this sector. It is the cheapest (charging only 0.07 per cent), largest, most liquid and best tracking ETF following the S&P 500 index, which remains the most high-profile US equity index. The fund has over £25bn in assets, a huge secondary market and an almost negligible spread. Lyxor has launched a rival US equity ETF tracking the Morningstar US index, charging only 0.04 per cent, however the fund is domiciled in Luxembourg and unfavourable tax treatments for US dividends between the US and Grand Duchy rule this product out.
Xtrackers S&P 500 UCITS ETF GBP Hedged (XDPG)
Taking currency risk out of a portfolio remains vital for safety-conscious investors, and managing the fluctuations between sterling and the dollar is important during a time of diverging monetary policy between the nations’ central banks, and while Brexit is affecting sterling. This Xtrackers product kept its place with full support from the panel, with its dynamic hedging strategy, where it hedges continuously rather than monthly like rivals, and low cost of only 0.09 per cent winning plaudits. The ETF is large, liquid, cheap to trade and low cost, and does what it does excellently.
SPDR S&P US Dividend Aristocrats UCITS ETF (USDV)
The US equity market is not as strong for income as others, such as the UK. Nonetheless income-seekers could benefit from the yield and income diversification on offer. This SPDR ETF tracks the S&P US Dividend Aristocrats index, which includes companies from the S&P Composite 1500 index, but favours those that have increased dividends for the past 20 years rather than the highest yielders. Given the US is more of a growth than income market, this index offers more growth potential than other pure US income ETFs, some of which are cheaper and higher yielding, while still offering a good yield of 1.97 per cent. The panel believed this was more than enough reason to keep this ETF, which actually increased its price from 0.3 per cent to 0.35 per cent in 2018. Despite this, it remains a good product, with a very low bid/offer spread, a good secondary market and an excellent index-tracking record.
GLOBAL EQUITIES (THREE ETFs)
While some investors may prefer to manage their own geographic exposure to world markets, a global equity tracker always provides a simple and effective way to tap into the world’s largest stocks and their return potential.
HSBC MSCI World UCITS ETF (HMWO)
This staple ETF tracks the best-known global equity index, the MSCI World, giving investors exposure to the world’s largest developed country stock markets. With a 0.15 per cent charge, this HSBC ETF remains one of the cheapest, most liquid and tradeable ETFs, with the panel commending HSBC for its portfolio management style. iShares offers a similar ETF which is larger in size and has a marginally better tracking error record, however at a 0.2 per cent ongoing charge, the HSBC option remains a firm favourite. Other providers such as Amundi and Legal & General have both recently launched similar products, charging 0.05 per cent and 0.1 per cent respectively. However, they are both currently too small to include, but investors should watch this space for further savings.
iShares Core MSCI World UCITS ETF GBP Hedged (IWDG)
Even though global equities involve buying a range of regions and currencies, the MSCI World index does have a high weighting to the US and the dollar and therefore currency hedging is something cautious investors should consider. Unlike the unhedged market, the sterling hedged space is less competitive, but this iShares product, which is run in the same fashion as the aforementioned unhedged iShares ETF, is a standout. It is the cheapest sterling hedged global equity ETF, charging 0.3 per cent, the most liquid, cost-effective to trade and has an excellent tracking error.
SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)
Global income ETFs are a good way for investors to pick up safe and secure income from the world’s best dividend-payers at a relatively low cost. This ETF, like its US counterpart, focuses on sustainable dividend-payers and only includes companies with a 10-year record of maintaining or growing their dividends. With 100 holdings, it is well diversified and does not chase yield at the expense of growth. SPDR’s execution of this S&P income methodology is strong, hence why this product is favoured by the panel, and its sister products are chosen elsewhere. With a 0.45 per cent charge, it is not the cheapest ETF overall, but is among those offering global equity income. It is also large, liquid, easy to trade and has a respectable tracking difference.
JAPANESE EQUITIES (TWO ETFs)
Each country’s stock market offers something slightly different. UK investors have always had a love/hate relationship with Japan, but the country’s stock market offer access to some of its most innovative companies alongside champions of industry. Japanese businesses are undergoing a serious change in culture, potentially making companies more interesting and better value. Its location has also made it an excellent way to access companies with exposure to rising Chinese consumption, without the volatility of emerging markets, with consumer companies finding a new lease of life as exporters. Japanese equities have a place in a globally focused growth portfolio.
iShares Core MSCI Japan IMI UCITS ETF (SJPA)
This iShares product is a firm favourite among the panel, providing exposure to 99 per cent of the Japanese stock market. The underlying index, MSCI Investible Market Index (IMI) Japan, includes nearly 1,300 companies and this ETF is the cheapest way to access it with a 0.2 per cent charge. Total cost of ownership is very good, with the £2.7bn fund offering good liquidity, a good secondary market, excellent trading costs and small tracking error.
Lyxor JPX-Nikkei 400 UCITS ETF GBP Hedged (JPXX)
The Japanese currency is seen by many investors as a safe haven asset, which means it can strengthen in times of volatility. For investors who want exposure to Japan without the volatility, hedging away yen exposure makes perfect sense. This ETF tracks the Nikkei 400 index, which is more concentrated than the MSCI IMI Japan index with only 400 stocks. The Nikkei 400 screens companies by return on equity, operating profit and positive corporate governance, giving investors access to Japan’s highest quality companies. This ETF is the cheapest way to track the Nikkei 400 with hedging, charging only 0.25 per cent. It is not the largest or most liquid option, with Xtrackers offering a similar product – but this charges 0.3 per cent and the panel rated Lyxor’s portfolio management and trackingdifference record.
EUROPEAN EQUITIES (TWO ETFs)
European equities is where we have seen significant change from the 2018 selection in both Core and Satellite ETFs, changing the structure of what we recommend for this very out-of-favour region. European equities’ popularity has plummeted in the past year, with its lacklustre domestic economic growth hampering earnings at domestic companies, and its place at the centre of global economic trade threatened by trade wars and slowing global growth. Nonetheless, Europe is home to some excellent companies and world-leading sectors and should be included in a balanced portfolio.
Dropped from the 2018 selection:
Xtrackers Euro Stoxx 50 UCITS ETF (XESC)
The panel took the decision to drop this highly concentrated megacap ETF over the exposure it provides rather than any issue with this specific product. The Xtrackers ETF is an excellent and cost-effective way to get exposure to the Euro Stoxx 50 index, but the panel felt this index was too narrow to be included in investors’ core growth portfolios, opting instead to support broader indices such as the FTSE Developed Europe index.
Xtrackers MSCI EMU UCITS ETF GBP Hedged (XD5S)
This ETF was dropped due to the launch of a new and cheaper share class by iShares. The panel still supports the need for a sterling hedged ETF, and still rates this ETF by Xtrackers; however it has just been replaced by a better and cheaper product.
2019 selection:
Vanguard FTSE Developed Europe ex-UK UCITS ETF (VERX)
This ETF and index provides investors with broad exposure to Europe’s equity markets at a very reasonable price. The Vanguard product is the same price as similar offerings from iShares and Xtrackers, but is the largest, most liquid to trade and offers the best tracking record. It charges only 0.12 per cent and the underlying index includes more than 450 companies across a range of developed European countries. Mr McManus says this ETF is a great core holding, very liquid and with very broad exposure. Legal & General has launched L&G Europe ex UK UCITS ETF (LGEU), which is cheaper at 0.1 per cent. But this fund is still new and does not offer the efficiency and liquidity of the Vanguard product.
NEW: iShares MSCI EMU UCITS ETF GBP Hedged (CEUG)
This ETF was launched last year as a sterling hedged share class of the very large and liquid iShares MSCI EMU UCITS ETF (CEU1), which has £1.8bn in assets under management, providing investors hedged exposure to the countries in the eurozone for a mere 0.12 per cent charge. This ETF replaces XD5S on the basis that it provides the same exposure at a much lower price, with greater liquidity as it leverages the liquidity of the non-hedged ETF.
ASIA PACIFIC EX JAPAN EQUITIES (ONE ETF)
Diversification across geographies, accessing several growth markets and having exposure to different and exciting growth markets should be a consideration for all investors, and the Asia Pacific region falls firmly within that. This region, which excludes Japan, gives investors exposure to developed markets including South Korea and Australia, but also emerging markets in China and Thailand. This is one area where we have changed what we include, moving our focus away from broad Asia to include other regions such as Australia and New Zealand. This is because emerging markets also include Asian economies such as China and Thailand, and so we were conscious of creating too much overlap.
Dropped from the 2018 selection:
Vanguard FTSE Developed Asia ex Japan UCITS ETF (VAPX)
This Vanguard ETF is still highly rated by the panel, but was removed because the index it tracks, FTSE Developed Asia ex Japan, includes a 26 per cent weighting to South Korea, which is also included in the MSCI Emerging Markets index (FTSE classes South Korea as developed whereas MSCI lists it as emerging). The product is liked, but its replacement is cheaper and offers a broader range of exposures.
HSBC MSCI All County Far East ex Japan UCITS ETF (HMAF)
This MSCI product was also removed because of too much of an overlap with MSCI Emerging Markets, but also at a significantly higher cost. The ETF charges 0.45 per cent whereas the replacement ETF, which tracks a broader MSCI index, charges less than half this amount.
2019 selection:
NEW: iShares Core MSCI Pacific ex-Japan UCITS ETF (CPJ1)
The panel supported the decision to replace both existing Asian ex Japan equity ETFs with this product, and to change the sector to include a broader region in other Pacific stock markets. This product from iShares tracks the MSCI Pacific ex Japan index, which leans more towards the Australian and Singapore markets, which were either not included in the old selections or crowded out by emerging markets. The iShares product is cheaper as well, charging only 0.2 per cent, and has over £1.3bn in assets under management, excellent trading liquidity and a good tracking record.
EMERGING MARKET EQUITIES (ONE ETF)
Some may argue emerging markets are too volatile for most investors, but for those with a long-term investment horizon and a reasonable risk tolerance, they should be a small but permanent holding in a growth portfolio. Emerging market ETFs include exposure to some of the fastest growing companies in the fastest growing regions and consumers of tomorrow, which investors can ill afford to ignore.
iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM)
Mr McManus describes this ETF as his absolute favourite and standout product in the entire market. The iShares fund is incredibly popular, even for a region where many investors choose to go active, and has amassed over £10bn in assets since launch in 2014. Alongside this increasing popularity has been a decreasing fee, with iShares cutting the charge to 0.18 per cent from 0.25 per cent last year. The ETF’s tracking record is sublime, while it has over £474,000-worth of shares traded daily, making it very cheap to buy. The MSCI Emerging Markets IMI index includes more than 2,500 emerging market companies across China, South Korea, Taiwan and India – giving investors exposure to the world’s fastest growing regions.
BONDS (FOUR ETFs)
Bonds and fixed-income instruments may have been out of favour in recent times due to lofty valuations, but their diversification attributes cannot be ignored. When equity markets go south, investors will need some different exposure in their portfolios to help mitigate losses, and bonds provide that. However, we are conscious that bond ETFs are not for everyone and actively managed strategic bond funds are popular, so have streamlined our bond selection to remove ETFs that offer exposure we think is not hugely relevant for private investors. There is no view that these are bad or expensive ETFs, but simply a view that they do not warrant a place in a succinct list of ETFs investors should consider.
Removed from the 2018 selection:
iShares Global Aggregate Bond UCITS ETF (SAGG)
One exception to the above is this iShares ETF, which was included for the first time in 2018, after launching in 2017. The panel still believe this is an outstanding product, but it has been replaced by its sterling hedged version. The Bloomberg Barclays Global Aggregate Bond index has huge exposure to non-sterling currencies and a lot of dollar exposure, so investors using this product for diversification and risk management are also more likely to want to remove currency risk, hence the swap.
- iShares Global Government Bond UCITS ETF (SGLO)
- iShares £ Index-Linked Gilts UCITS ETF (INXG)
- Lyxor iBoxx $ Treasuries 1-3 yr UCITS ETF (U13G)
- iShares £ Corporate Bond 0-5yr UCITS ETF (IS15)
- iShares Global Corporate Bond UCITS ETF (CRPS)
2019 selection:
Lyxor FTSE Actuaries UK Gilts UCITS ETF (GILS)
This Lyxor ETF has been included in the IC Top 50 for some time and keeps its place. The FTSE Actuaries Government Securities UK Gilts index tracks a broad basket of UK government bonds across a range of durations (the length of time left before a bond matures – the longer this is, the more a bond is at risk of capital falls if interest rates start to rise), giving it an average duration of 11.6 years. Despite the duration of this product causing alarm for some, bonds – in particular UK government ones – provide investors with insurance and safety in times of market stress and this product remains an excellent way to access them, with good portfolio management, liquidity and trading costs. The ETF is also low cost, charging only 0.07 per cent; however Invesco launched a rival product charging 0.06 per cent earlier this year – a product the panel will be monitoring with interest.
Lyxor FTSE Actuaries UK Gilts 0-5yr UCITS ETF (GIL5)
For investors worried about exposure to rising interest rates, Lyxor also offers a short-duration product capping exposure to bonds with fewer than five years left until maturity. These bonds are less volatile, and give more of a cash-like exposure, with only 2.2 years’ duration and a lower yield than its longer-duration counterpart. Similarly, the panel rates Lyxor’s portfolio management and the fund is very popular and easily and cheaply tradeable, and also charges 0.07 per cent. However, Invesco has also launched a rival ETF charging 0.06 per cent, which we will consider next year.
NEW: iShares Global Aggregate Bond UCITS ETF GBP Hedged (AGBP)
This sterling-hedged ETF replaces SAGG to provide broad exposure to global bonds while removing currency risk. The panel highly rates this iShares ETF, which only launched in 2017, but has already amassed over £1.5bn in assets, with around 22,000 shares traded every day, making it incredibly liquid and cheap to trade. It also has an ongoing charge of 0.1 per cent, which for hedged exposure to the world’s debt markets offers very good value for money. The index tracks the Bloomberg Barclays Global Aggregate Bond index – the broadest compilation of global debt available, with iShares portfolio management also providing an excellent index-tracking record.
iShares Core £ Corporate Bond UCITS ETF (SLXX)
While Lyxor built a name for itself for government bond ETFs, the panel could not look beyond the quality of iShares’ products for sterling corporate bonds. This ETF has an ongoing charge of 0.2 per cent and substantial assets, with over £1.7bn under management, keeping the bid/offer spread relatively low for a fixed-income ETF. SLXX is a behemoth compared with its rivals from SPDR and Lyxor, and it tracks the Markit iBoxx GBP Liquid Corporates Large Cap index, providing sector-diversified exposure to the UK debt markets. Corporate bonds can be useful for those wanting to diversify away from equities but wanting a higher yield than government bonds and some potential for long-term capital growth, although this does come with more risk.
To view the rest of the Top 50 ETFs 2019, click below:
