Top 50 ETFs 2021: Core ETFs

Our core ETF selections for 2021

UK equities (4 ETFs)

Having borne the brunt of the initial pandemic sell-off in 2020 and struggled before that, UK equities have more recently seen a dramatic turnaround. Domestic shares led the cyclical rally that has largely dominated the half year since news of a successful coronavirus vaccine in November last year. While opinion is split over how much further any rebound has to go, building exposure to the domestic market is an obvious option for UK investors getting started.

iShares Core FTSE 100 UCITS ETF (ISF)

Like most of our core options, this was something of a no-brainer for our expert panel. A key offering from iShares, this FTSE 100 tracker had assets worth more than £9.5bn in late June, a size that offers good liquidity and a low bid/ask spread for those buying and selling. When combined with the fund’s rock-bottom 0.07 per cent fee, this offers extremely cheap exposure to the UK’s blue-chip index.

As ISF is a distribution class, its investors receive dividends generated from FTSE 100 stocks, enabling them to benefit from any income recovery in one of the world’s highest-yielding markets. This share class had a 3.33 per cent distribution yield on 21 June and could be an attractive alternative to the dividend ETFs mentioned later on.

Lyxor Core UK Equity All Cap UCITS ETF (LCUK)

This recently renamed fund has a broader focus than the likes of ISF, with a focus on both large and mid-cap stocks. The index it tracks was composed of 310 companies, as of late June. Impressively, this ETF charges just 0.04 per cent and has grown significantly in size over the past year, from £37m at the time the 2020 list was compiled to £237m in June 2021.

That said, one member of our panel was not keen on this fund. IG’s Sam Dickens warned that its investors are not getting as meaningful a mid-cap exposure as they might assume, as illustrated by the ETF's failure to capture much of the FTSE 250’s outperformance versus the FTSE 100 since the start of 2020. Rather than using this as a broad play, he would instead hold iShares Core FTSE 100 UCITS ETF alongside Vanguard FTSE 250 UCITS ETF (VMID), about which you can read in the UK satellite category.

SPDR FTSE UK All Share UCITS ETF (FTAL)

SPDR FTSE UK All Share UCITS ETF remains in the list as a play on a UK index familiar to many investors. It offers a fairly broad take on the UK, taking in the whole market cap spectrum and around 600 different companies. The fund looks slightly expensive compared with the other UK options, although this is due to a lack of alternative FTSE All Share ETFs.

NEW: Amundi MSCI UK IMI SRI UCITS ETF (FT1K)

We have replaced last year’s environmental, social and governance (ESG) ETFs with funds that take a stricter approach and deviate more radically from conventional indices. Broadly speaking, we have favoured variants of MSCI’s SRI indices, which select companies with the highest MSCI ESG ratings from a given market.

While stricter ESG ETFs were relatively rare in the UK just a year or two ago, these have started to proliferate. Options include Xtrackers MSCI UK ESG UCITS ETF (XASX) and UBS MSCI UK IMI SR UCITS ETF (UKSR). While all are feasible options, AJ Bell’s Matt Brennan favoured our chosen ETF because of Amundi’s strong credentials in the ESG space. It also has a charge of 0.18 per cent, making it notably cheaper than the UBS fund.

Amundi MSCI UK IMI SRI UCITS ETF offers a mix of exposures to companies of different sizes, although factsheets for the index it tracks suggest that the number of companies it holds is relatively limited – the index had 137 constituents at the end of May. And even the stricter ESG index ranges can include companies that may not seem to fit the theme. The UK ETFs listed above all recently included mining giant Rio Tinto (RIO) in their top 10 holdings, for example. This is because the indices they follow invest in the best names in a sector as judged by ESG criteria. While many other miners have been excluded from these funds, Rio appears as a leader in its sector.

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L&G UK Equity UCITS ETF (LGUK)

Like our other core ESG options from 2020, this fund exits the 2021 list on the back of concerns that it has too much in common with its underlying market. While lighter ESG ETFs may be one way for investors to dip their toe into the ESG space, we now believe that a more distinctive approach is preferable. You can read more on the differences between different ESG ETFs in How ethical is your ESG ETF? (IC, 05.03.21)

US equities (3 ETFs)

The market rotation of recent months has not prevented the growth-heavy US market from posting some decent returns, with the S&P 500 having notched up an 11 per cent sterling total return as we approached the halfway point of 2021. While rockier times may lie ahead, this market has been notoriously difficult to outperform in the past decade, making passive funds an attractive option. Our core ETFs offer different ways of playing this market.

iShares Core S&P 500 UCITS ETF (CSP1)

Much like the FTSE 100 tracker mentioned earlier, this remains an obvious option for our panel. The fund tracks the most established US equity market for an extremely low fee of 0.07 per cent. With total assets of more than $48bn (£34.79bn) on 22 June, it is not lacking when it comes to liquidity.

Like any S&P 500 tracker, this fund has significant exposure to the FAANG stocks (Facebook (US:FB), Amazon.com (US:AMZN), Apple (US:AAPL), Netflix (US:NFLX) and Alphabet (US:GOOGL)), something that has worked out extremely well in recent years. However, investors picking their own stocks or funds alongside this should remember the risk of doubling up: US tech names can have a large footprint in many global and thematic funds.

Xtrackers S&P 500 UCITS ETF GBP Hedged (XDPG)

Predicting currency moves is no mean feat and we would generally argue that running a geographically diversified portfolio is a better way to offset them than hedged products. That said, we do outline the options available for investors with an interest in hedging a particular market exposure back to sterling. And with sterling having strengthened against other major currencies, hedged share classes have served investors well in the past year.

When it comes to US equity exposure hedged back to sterling, this ETF remains popular with our panel. It is only marginally more expensive than the unhedged option in our list and has a good level of scale. And with the US dollar weakening against sterling in the past year, this ETF has notably outperformed the unhedged iShares Core S&P 500 UCITS ETF.

NEW: iShares MSCI USA SRI UCITS ETF (SUUS)

Once again, we are introducing a stricter ESG fund to the list. This ETF tracks the MSCI USA SRI Select Reduced Fossil Fuel index and targets companies with “outstanding ESG ratings and minimal controversies”. It favours stocks with stronger ESG scores while screening out companies from certain controversial sectors.

Stricter ESG funds can end up excluding a large part of the underlying market, leading to significant differences in what you hold and the performance you get. This fund had just 133 holdings on 21 June and none of the FAANG stocks. Its second-biggest position on that date was Tesla (US:TSLA), whose recent dalliance with Bitcoin has raised eyebrows among environmentalists. But passives are not the only types of fund to hold controversial names: popular active funds can also hold companies that might seem questionable, from Baillie Gifford Positive Change Fund's (GB00BYVGKV59) Tesla stake to Liontrust’s sustainable investing team holding Kingspan (KGP).

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Invesco S&P 500 ESG UCITS ETF (SPEP)

This fund’s light ESG approach means that it can have much in common with a conventional S&P 500 tracker and can end up having even bigger stakes in some of the big tech names that have dominated the parent index. For investors who don't wish to deviate significantly from the leading equity market for the sake of ESG goals, a conventional tracker may be a better option than this fund.

Global equities (3 ETFs)

When it comes to core holdings, a global equity tracker can be a useful mainstay for a broader portfolio. But remember that MSCI World, one of the best-known global indices, only focuses on developed markets and has a heavy weighting to the US. So a broader exposure may be achieved by using an MSCI All Countries World index tracker or adding some regional ETFs into the mix.

HSBC MSCI World UCITS ETF (HMWO)

This ETF continues to stand out as a good source of exposure to the widely followed MSCI World index. It has a good level of scale and a highly competitive fee of 0.15 per cent.

This fund gives exposure to more than 1,000 different stocks, but is not quite as global as its name suggests. Around two-thirds of its assets are in the US, with names such as Apple and Microsoft (US:MSFT) among its biggest positions. So if you hold this, you may wish to diversify further with additional funds, although be aware of the risk that they might double up on positions in the biggest US stocks.

iShares Core MSCI World UCITS ETF GBP Hedged (IWDG)

This fund may appeal to investors worried about currency fluctuations related to the US and the other regions in the MSCI World index. Its 0.3 per cent charge is not excessively high, although some may ask whether it is worth paying double the fee charged on the unhedged HSBC product.

NEW: iShares MSCI World SRI UCITS ETF (SUWG)

A global equivalent of the new ESG option in our US core category, this fund provides exposure to some of the best names in the MSCI World index as judged using ESG criteria. It excludes much of the index, but still has a good level of diversification with 362 holdings on 21 June. It also comes with a good level of assets, which should bode well for liquidity, and a competitive fee of 0.23 per cent.

As with other ESG options, pay close attention to what the fund holds. Like a conventional MSCI World tracker this name has a significant allocation to US equities and the information technology sector. And like its US SRI peer, it doesn't hold the FAANGs but does have a notable position in Tesla.

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iShares MSCI World ESG Screened UCITS ETF (SAWD)

As in the other categories, we have dropped this lighter ESG name in favour of the fund listed above. While investors will have to decide whether they want to ditch the likes of the FAANGs in the name of ESG, this fund has slightly higher exposure to them than its parent index. It should make more sense to either go for conventional exposure to the market via a non-ESG fund or take the plunge with iShares MSCI World SRI UCITS ETF.

Japan equities (3 ETFs)

The Japanese stock market has lagged other parts of the world in the recent cyclical rally, making it even less likely that this region will appear high up on an investor’s shopping list. But you may nevertheless want some exposure for diversification, as well as the fact that Japan looks cheap relative to other major markets and could continue to benefit from the promising corporate governance reforms that began a few years ago.

iShares Core MSCI Japan IMI UCITS ETF (SJPA)

Like many of the core equity ETF selections, this fund proved uncontroversial among our panel. One of our panelists, Seven Investment Management’s Peter Sleep, noted that MSCI’s index seemed a better way to invest in Japan than the Topix. MSCI Japan IMI index is fairly broad with around 1,200 stocks. iShares Core MSCI Japan IMI UCITS ETF also ticks other important boxes: it is large and liquid with a low fee of 0.15 per cent.

Lyxor Core MSCI Japan UCITS ETF GBP Hedged (LCJG)

Sterling has strengthened notably against the Japanese yen in the past year. If you are worried that this will continue and erode your returns this fund might be an option. Investors should note that this fund tracks a different index to the iShares option listed above. The index tracked by the Lyxor fund recently had just 272 constituents compared with 1,200 in the MSCI Japan IMI index, giving somewhat narrower exposure.

That said, it still offers fairly broad exposure and Lyxor Core MSCI Japan UCITS ETF's charge is relatively low for a hedged product at just 0.2 per cent.

NEW: iShares MSCI Japan SRI UCITS ETF (SUJA)

Once more, we have opted for an ESG fund that takes a stricter approach, favouring companies with the best metrics. This fund’s focus on the best ESG names has made it more concentrated than many equity trackers, with just 65 holdings in late June. But it has posted a strong performance in the past year. The fund's biggest sector weightings at the time were in industrials, information technology and healthcare. iShares MSCI Japan SRI UCITS ETF has a good level of scale and a charge of just 0.2 per cent.

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L&G Japan Equity UCITS ETF (LGJG)

This lighter ESG offering leaves the list to make way for the name highlighted above. While this fund offers relatively broad Japanese exposure, it may not offer enough distinction from a conventional tracker for dedicated ESG investors.

Europe equities (3 ETFs)

Though often maligned, European equities can perform strongly, as was the case last year when European stocks were among the best-performing major equity regions. If you believe that a prolonged cyclical rebound is due, you may favour the region given its high exposure to economically sensitive sectors such as financials.

Vanguard FTSE Developed Europe ex UK UCITS ETF (VERX)

This ETF offers broad exposure to the European market with 478 stocks at the end of May. The ETF has a good mix of country exposures, with France, Germany and Switzerland making up its biggest allocations. With €1.4bn (£1.2bn) in assets and a 0.1 per cent fee it should prove to be liquid and cost-effective.

iShares Core MSCI EMU UCITS ETF GBP Hedged (CEUG)

Europe is an area where our panelists sometimes disagree about the best indices to track. This year, one panelist was worried because MSCI EMU index excludes certain countries such as Switzerland, and argued in favour of a fund that tracks a broader index. But we still believe that this ETF has relatively balanced exposure with nearly 241 stocks across various countries. And it provides a currency-hedged option for a very reasonable 0.12 per cent charge. Depending on your outlook, you may like that it gives greater exposure to the likes of Germany than a more diversified index.

NEW: UBS MSCI EMU Socially Responsible UCITS ETF (UB39)

This more stringent ESG fund allows investors to focus on some of the best possible ESG holdings listed in Europe within a passive format. But it is more expensive than the other ESG ETFs on our core equity lists. Also remember what you are giving up for this approach, as MSCI EMU index already excludes various countries. This fund has 54 holdings so is a much more concentrated bet than many conventional trackers. As with other ESG portfolios, monitor this fund's holdings carefully.

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L&G Europe ex UK Equity UCITS ETF (LGEU)

This removal is another case of us dropping a lighter ESG fund in favour of one with a more stringent approach. This ETF offers a relatively broad exposure to the European market, but that can also be achieved via the non-ESG funds on the list.

Asia Pacific ex Japan equities (1 ETF)

Asian stocks soared ahead for much of 2020, thanks in part to the huge gains made in the Chinese market. But the composition of widely followed Asia indices has much in common with emerging market indices, leaving you at risk of doubling up if you invest in both. This complication explains the slightly unusual choice of ETF in this category.

iShares Core MSCI Pacific ex-Japan UCITS ETF (CPJ1)

Unusual at it may seem, this ETF keeps its place in the list to complement the emerging markets funds listed below. It focuses on the pacific region, so has a significant allocation to Australia, a large weighting to Hong Kong and a modest focus on Singapore and New Zealand.

This differentiates it from the China-heavy emerging markets and Asia-focused funds on the list and can add a good level of geographical diversification. That said, consider whether you might find our emerging market options more exciting than this play on what Seven Investment Management's Peter Sleep describes as a “backwater”.

Emerging market equities (2 ETFs)

Emerging market stocks have had a disappointing decade in terms of performance and, over the first half of 2021, this has continued with these lagging many other regions. But you may still want a decent allocation to these regions given the rise of China and other high-growth economies. Some emerging markets may also rebound strongly on the back of global economic growth, though you may need to invest in an active fund or single country ETF for more concentrated exposure to these.

iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM)

Tracking a version of one of the most widely followed emerging market indices, this ETF gives reasonably broad exposure to the region. It had nearly 3,000 holdings in late June with exposure to a wide range of different countries at a good price of 0.18 per cent.

But the index it tracks is heavily tilted to its biggest constituents. So its top four holdings, Taiwan Semiconductor Manufacturing (TAI:2330), Tencent (HK:0700), Alibaba (HK:9988) and Samsung Electronics (KS:005930) made up more than 15 per cent of the fund’s assets on 22 June, while around a third of it was invested in China. Investing passively in Asia and emerging markets can leave you reliant on the winners of recent years – for better or worse.

NEW: Xtrackers MSCI Emerging Markets ESG UCITS ETF (XESE)

This is a stricter ESG option, with a 0.25 per cent fee and good mix of holdings. The fund tracks an index made up of 361 companies listed in 25 countries at the end of March.

That said, as with some other ESG options, this can take even bigger bets on market leaders than a conventional tracker fund. Xtrackers MSCI Emerging Markets ESG UCITS ETF has large positions in Tencent and Alibaba, which accounted for about a quarter of its assets in late May, as well as a heavy allocation to China.

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iShares MSCI Emerging Markets IMI ESG Screened UCITS ETF (SAEM)

This is a light ESG fund that has much in common with MSCI Emerging Markets index, to which you can get exposure via a non-ESG emerging markets tracker fund.

Bonds (4 ETFs)

Fixed-income has had a dramatic 18 months. Government bonds held up well in the 2020 sell-offwhile corporate bonds performed particularly well as equity markets recovered. But in the first quarter of this year government bonds wobbled due to inflation fears, although have since stabilised. We have stuck with the four core bond offerings on last year's list because they seem to be valuable sources of fixed-income exposure. But reflect on what form of bond exposure you personally will have – if any – if you think that inflation is a serious threat. 

Lyxor Core UK Government Bond UCITS ETF (GILS)

A regular on this list, Lyxor Core UK Government Bond UCITS ETF tracks FTSE Actuaries UK Conventional Gilts All Stocks index, which is composed of a variety of UK government bonds with different levels of duration (interest rate sensitivity). The ETF has decent liquidity and an attractive fee of 0.07 per cent.

Investors have written off government bonds as a defensive asset time and time again, to their detriment. But a prolonged bout of inflation would hurt this asset class if it did arrive. The ETF could perform badly if inflation returns in force and its duration recently came to a reasonably high 12.2 years, leaving it vulnerable to interest rate rises, which might follow an inflationary environment. So you may wish to diversify via other bonds or defensive assets.

iShares £ Index-Linked Gilts UCITS ETF (INXG)

Introduced to the list last year on the back of early concerns about inflation, this product could fare well if such fears come true. Its coupon payments are linked to inflation and products like these tend to perform well when inflation expectations rise. This fund has a particularly attractive fee of 0.1 per cent.

However, inflation-linked bonds often have high levels of duration, leaving them exposed to interest rate rises. So timing your exit from products such as these can be important, but doing this is not necessarily easy.

iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (AGBP)

This ETF continues to be a good source of broad, sterling-hedged exposure to global bonds. It holds various different forms of fixed income, from government bonds across the world to corporate debt and held more than 8,000 bonds in June. While it may not escape a fixed-income sell-off, it is a well-diversified source of exposure to different defensive bonds.

iShares Core £ Corp Bond UCITS ETF (SLXX)

Having been the subject of debates about liquidity in the sell-off of February and March 2020, large corporate bond funds like this ultimately posted a good return last year. But so far, 2021 has been much more turbulent. The investment-grade bonds this ETF tracks are viewed as defensive but have some correlation to government debt which has had a rocky few months.

If you want investment-grade-rated bond exposure, this fund provides it in a diversified fashion. It held more than 450 bonds in late June, with exposure to a variety of geographies and levels of credit quality. A good chunk of its assets are in the UK and US.

Last year we warned that just over half of iShares Core £ Corp Bond UCITS ETF’s assets were in BBB debt – the lowest rung of investment-grade most vulnerable to downgrades in difficult times. But with economic conditions improving, this risk may be less of an issue than in 2020.

Discover our selection for 2021 here: 

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