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Top 50 ETFs 2019

Taha Lokhandwala reveals our updated selection of 50 building-block ETFs for use in all types of portfolios
May 31, 2019

This year marks the sixth edition of the Investors Chronicle Top 50 exchange-traded funds (ETFs) report – highlighting the funds we believe are currently the most useful building blocks when creating a low-cost and generally passive-invested portfolio and to support a largely active funds one. Each year we run through the ever-growing ETF market and hand-pick the best core, satellite and niche investment products around. These include those that investors should buy and hold and build their portfolios around, more esoteric products aimed at boosting returns and yield, and more specialist funds that have piqued the interest of a lot of investors.

We have made 16 changes to the list from 2018, but this is part of a shake-up of how we set out our Top 50. This year’s list has been split into three sections to account for the three types of ETFs included. These sections are Core (buy-and-hold), Satellite (growth and income boosters) and Niche (specialist). This year we’ve overhauled the types of funds included. There are now significantly fewer bond funds. While we have kept some bond ETFs, we have removed geographies and strategies where we believe private investors have no desire to invest passively, either because the risks are too high, or the asset class is not good enough as a core holding or does not offer enough growth or yield to warrant inclusion in the satellite section.

Those bond ETFs have been swapped for a greater focus on ethical ETFs, including ones tracking indices focused on environmental, social and governance metrics, sustainability and gender equality. This year’s list also includes thematic ETFs for the first time. These are equity products that provide exposure to specific trends or themes which we and our expert panel believe have the potential to add value over time.

Overall, we have maintained the bias towards equity funds, but have rejigged the composition and moved away from recommending ETFs investing in more illiquid spaces, such as small-caps. As always, our main focus is on the largest markets, where active fund managers find it most difficult to outperform an index and where easy and low-cost passive investing offers its best rewards.

To create the final list of 50, we’ve had the help of our expert panel and have used several metrics. These include looking first and foremost at what index the ETF is tracking. Before cost or anything else, this is the main criteria investors should use when deciding which ETF to buy – does the index tracker you’re buying provide the exposure you want, in the right way and following sensible logic, and do you understand all of the above. If the answer to any of these questions is no, then you may need a different solution.

The ETFs we have chosen in this report all track what we believe are valuable indices, and are structured to give exposure in the right way. The list includes a collection of market-cap-based indices, where an ETF buys more of the largest stocks, and alternative indices (sometimes known as smart beta), where the weightings to each stock are decided based on different criteria, such as a stock’s share price volatility or because of a company’s governance and environmental record. Each has their place in investor portfolios.

To come up with the final list of 50 we weighed up several metrics in addition to the index quality. These include the quality of the provider’s portfolio management, fund liquidity, fund size, trading costs, total returns, tracking difference and of course ongoing charges – often the primary reason for choosing an ETF over an active fund.

It is always worth remembering that an ETF with very low trading volumes and a wide bid/offer spread will hold back returns, even if its headline charge is attractive. So we ruled out some products simply for being too small. In an ETF, size is the biggest driver of quality. The more assets, the more efficiently an ETF can track its index and be traded, and this is vital. It is also easier for investors to buy into a larger ETF as, in theory, there should be a good secondary market for the shares.

Sometimes we have chosen a more expensive ETF because it is better at tracking an index or easier to trade. In other situations, we have selected a smaller ETF that is slightly less liquid to trade because it tracks a better index or its lower ongoing charges will be beneficial over the long term. There is never a clear-cut way to pick the best ETF and our decisions are based on a balance of these factors. All of the 50 choices take account of the total cost of ownership (TCO), and balance this with the likely performance relative to the market, index and other products.

Our starting point was looking at the performance and tracking difference of the 50 ETFs in the 2018 list and seeing whether any had not performed to expectation or if a substitute product had performed better.

The panel was then asked to: a) review the spread of categories and recommend any to be expanded, added or dropped; and b) to consider the best indices to track in those categories and recommend specific ETFs for those categories. We then crunched Morningstar and FE Analytics data on the entire London-listed ETF universe to find the best ETFs based on ongoing charge, fund size and bid/offer spreads, liquidity (defined by average daily trading volumes), tracking difference and total returns.

We have continued to lean towards the most straightforward fund structures and have prioritised physically replicating ETFs where possible, rather than those that use derivatives.

Just because we have dropped an ETF does not mean we think you should sell or avoid it. Also, please remember this is not a suggestion to buy every ETF mentioned, nor is this a list of the 50 ETFs we think will be the best performers in the near future. The ideology behind this is to provide a succinct list of what we think are the best possible ETFs across different asset classes and different styles of investing. The list is here to be a helpful starting point when you have decided which assets you would like to invest in.

 

 

 

To view the Top 50 ETFs 2019, click below:

Core ETFs (20)

Satellite ETFs (18)

Niche ETFs (12)