ETHICAL (FIVE ETFs)
An investment ideology becoming increasingly popular is ethical investing – a catch-all term for investments that are made with some sort of non-financial criteria in mind, be it only picking stocks that have good ethical records, positive governance and environmental records, promote gender equality and other various ‘good’ factors. The idea that invested money should make a return, but also promote positive factors, is growing. And these ETFs offer investors a simple and low-cost way to invest in that idea.
Dropped from the 2018 selection:
This ETF, which actually reduced its fee from 0.38 per cent to 0.25 per cent, was dropped because another UBS ETF was deemed to track a better index. This remains a good product for those wanting a socially responsible screen and a higher weighting to global developed markets, but the panel decided a broader index was more appropriate.
This ETF was brought in to replace UC44 for a variety of reasons. First, the ETF extends its coverage to emerging markets as well as developed markets, and hedges away currency risk, and does all of this for a 0.48 per cent charge. While this is higher than the 0.25 per cent charged by UC44, the panel felt you were getting a lot more for your money. This global equity ETF tracks the MSCI All Country World Socially Responsible index, which tracks 583 stocks across 47 developed and emerging markets. The index weights to stocks by market cap, but screens out stocks whose products have a negative social or environmental impact – based on MSCI’s own research. Microsoft (US:MSFT) is the fund’s top holding, accounting for 7.9 per cent versus 2 per cent in the MSCI All Country World index.
This ETF kept its place from the 2018 selection, and follows the same methodology as AWSG but focuses on eurozone markets, and does not currency hedge. This is an option to allow investors to control their exposure to different regions. We would like to see more products alongside this European equity product, but currently this is the only one large enough and liquid enough to recommend. With a charge of 0.28 per cent it also offers reasonable value.
Countless studies have proved that companies with a focus on gender equality and diversity are better long-term stewards of shareholders’ capital, and this ETF from Lyxor retained its position after being included last year. It provides broad exposure to global equities, but with a bias towards companies that lead on gender diversity. It equally weights its 150 constituents, so it has a mid-cap tilt. It tracks the Solactive Equileap Global Gender Equality index, which screens companies based on board-level gender diversity, workforce, equal opportunities, parental benefits and pay. It keeps its exposure limited to 50 per cent in the US and 10 per cent in any other single country, and reduced its fee in 2018 from 0.33 per cent to 0.2 per cent. One aspect to be conscious of is blending this product with other socially responsible funds, as it could add in companies you do not want exposure to. For example, a company could have a poor environmental record but be a leader in gender equality and vice versa.
This is another ‘actively’ run ETF, which seeks to beat its benchmark, MSCI World, rather than simply replicate it. JPMorgan is a relatively new entrant into the UK ETF market, but the panel recommended this global equity fund run by Piera Elisa Grassi and Raffaele Zingone. The duo weight to stocks based on JPMorgan’s research, which identifies the impact of environmental, social or governance factors on company cash flow. They study the policies of the government and screen out companies that derive revenue from activities deemed unacceptable under ESG rules, and weight accordingly. The fund has Microsoft, Apple (US:AAPL) and Amazon (US:AMZN) as its top three holdings. The ETF is new and remains small, but with a charge of only 0.25 per cent, and JPMorgan’s large analyst team, the panel backed the product to succeed and provide something different to investors seeking a responsible investment ETF.
This sustainable investing ETF is the only bond fund in this segment. It tracks the Bloomberg Barclays MSCI US Liquid Corporates Sustainable index, which only invests in the debt of US companies that have an MSCI ESG rating of BBB or higher – and weights towards companies with the highest ratings, creating a ‘best in class’ ESG index. MSCI assesses companies on how they manage ESG risks compared with peers, studying the integration of ESG awareness into the company’s strategy, the values of the company and the impact it has on its stakeholders. BSUS tracks the index well, is large and liquid and has an ongoing charge of 0.25 per cent – which is impressive for an ETF that also includes currency hedging.
COMMODITIES AND PRECIOUS METALS (THREE ETFs)
Commodities have become increasingly easier to access via an ETF, meaning investors can now add diversification in a more cost-effective manner. We have made no changes to the selection from 2018, confident that the products continue to stand out and that a mix of economic commodities, gold and silver is enough for investors building simple and low-cost portfolios.
Invesco Bloomberg Commodity UCITS ETF (CMOD) (formally called Source Bloomberg Commodity)
This ETF was only launched in 2017, but has cemented its place as a firm favourite for commodity investors. The panel overwhelmingly recommended keeping CMOD, and it stays as the only synthetically replicated ETF in the selection. Investors must be aware of the 0.15 per cent swap fee that sits on top of the 0.19 per cent ongoing charge, but the fund tracks the commodities market well. iShares offers a similar product for the same ongoing charge, but a lower swap fee. However, the Invesco fund remains the largest and the most liquid to trade. The underlying index, Bloomberg Commodity, includes 22 commodities and bases the allocations on economic production of each material and the liquidity of futures contracts. It does not weight based on the price of the commodity, and rebalances annually. As it stands, its highest weightings are to gold at 11.9 per cent, crude oil at 8.1 per cent and copper at 7.8 per cent.
Invesco Physical Gold ETC (SGLD)
Gold acts as a portfolio diversifier, as well as a potential hedge against inflation. It tends to perform strongly when investors are nervous about the economic outlook. The panel still believes this is an excellent ETF for investors for their gold allocation. iShares offers a cheaper physical gold ETC, but only by 0.04 percentage points, and SGLD remains our preferred choice. It has a larger asset base and is more liquid – with a higher average trading volume – and has a far tighter bid/offer spread. It also has a lower tracking error.
Silver has multiple uses in acting as a hedge against inflation, but is also seeing its price increase with industrial activity, giving it slightly more of a cyclical focus than gold, but still making it a good store of wealth. The panel strongly recommended keeping this ETC in the selection; with a relatively low ongoing charge of 0.39 per cent, a very tight bid/offer spread and good daily volume, SSLV continues to perform and track the spot silver price very well.
THEMATIC ETFs (FOUR ETFs)
Thematic investing is growing in popularity. Rather than backing a region or market factor, investors back a theme which they believe will provide superior returns compared with the market over the long term. There are a lot of advantages to thematic investing versus geographic investing – buying into a theme means you’re only buying companies that you believe will grow, rather than simply expecting a company’s share price to grow based on where they are listed. Adding themes into a portfolio can also help diversification, as themes are not necessarily linked to economic cycles, so stocks involved in a theme may not fall as much in bear markets. It is not always so simple, of course – identifying the right theme is difficult and it may take many years to come to fruition.
iShares has started to dominate the thematic investment ETF space, launching several products that are all relatively cost-effective but more importantly tracking well-put-together indices. And these are the panel’s favourites:
NEW: iShares Automation & Robotics UCITS ETF (RBTX)
This ETF tracks iStoxx FactSet Automation & Robotics. Launched in September 2016, it has already amassed over £1.6bn, making it a very large and liquid ETF. The index weights to companies based on how much revenue they derive from automation and robotics industries. It has around 100 holdings, with 33 per cent in the US, 25 per cent in Japan and 10 per cent in Taiwan. The ETF has an ongoing charge of 0.4 per cent. Since launch it has returned 54 per cent versus a 34 per cent rise in the MSCI All Country World index.
NEW: iShares Ageing Population UCITS ETF (AGES)
This ETF has not amassed as many assets as RBTX, but a healthy £211m is enough to have scale, and provide liquidity and reasonable trading costs. The index, iStoxx FactSet Ageing Population, weights to companies weighted by how much revenue they derive from the world’s ageing population in both emerging and developed markets. The ETF has around 250 holdings and its composition is very different to a general global index, with only 36 per cent in the US but 11 per cent in Japan. The ETF has an ongoing charge of 0.4 per cent. Since launch in September 2016 it has returned 18 per cent versus a 34 per cent rise in the MSCI All Country World index.
NEW: iShares Global Clean Energy UCITS ETF (INRG)
This ETF tracks the S&P Global Clean Energy index, which tracks 30 companies operating in clean energy production or clean energy technology equipment. It only includes companies in developed markets and they must have a market cap greater than $300m (£233m). Stocks are weighted using a combination of their market cap and a ‘clean energy score’ given to them by S&P, with no stock allocated more than 5 per cent. The ETF is popular, with around £130m in assets under management, a negligible bid/offer spread and good liquidity. However it does charge 0.65 per cent so is more expensive than other thematic ETFs. Nonetheless, the theme is well known and the panel supported its inclusion. It is geographically diverse compared with other global equity ETFs, with 37 per cent in the US, 22 per cent in China and 11 per cent in New Zealand. The index has underperformed in the past three years, returning 37 per cent versus 51 per cent from the MSCI World index, owing to its underweighting the US.
NEW: iShares Digitalisation UCITS ETF (DGIT)
This ETF tracks the iStoxx FactSet Digitalisation index, which weights to companies based on how much revenue they derive from digital activity. Another popular ETF despite only launching in September 2016, it has £370m in assets and very good liquidity and low trading costs. Unlike its peer themes, this ETF has more weighted to the US, with 49 per cent, but also has 13 per cent in Japan, and more recognisable names such as Worldpay (US:WP) and PayPal Holdings (US:PYPL). It has 116 holdings and an ongoing charge of 0.4 per cent. Since launch, it has returned 41 per cent versus a 34 per cent rise in the MSCI All Country World index.
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