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Top 50 ETFs 2021

We highlight 50 of the best low-cost portfolio building blocks
July 8, 2021
  • ETFs can be a vital tool in a portfolio but it is very important to pick the best ones
  • We set out what look like some of the best ETFs in a number of investment areas

This marks the eighth edition of the Investors’ Chronicle Top 50 ETFs list, highlighting the exchange traded funds (ETFs) that we view as the most useful low-cost building blocks for an investment portfolio. An investment portfolio could be entirely composed of these passively managed funds, or they could sit alongside active funds and direct shareholdings.

We have opted to stick with the structure we introduced in 2019, with ETFs grouped into three broad categories to reflect the priorities investors may have when building a portfolio. The Core ETFs provide a good base exposure to important markets and can serve as buy-and-hold options. The funds in the Satellite category could either boost a portfolio’s income and growth prospects, or cater to more specific individual preferences. And the Niche category covers more specialist areas.

As in the previous two years, the list is focused on core and satellite holdings. We also maintain a bias to equity ETFs over other asset classes.

 

This year’s changes

While much of the list remains unchanged, there has inevitably been some turnover. The most obvious change relates to our environmental, social and governance (ESG) equity selections. Last year we included some 'light' ESG versions of conventional equity market trackers in the core lists as a palatable option for investors who didn't want to stray too far from the equivalent conventional index, but warned that our choices could change as this space evolved. A year later, we worry that light ESG ETFs have too much in common with conventional trackers, and have decided to replace the names in our list with ones that apply a stricter approach.

Stricter funds are likely to deviate more significantly from conventional markets – something worth bearing in mind – but should do more to satisfy ESG investors. It is important to look at where these funds are invested and whether their holdings fit in with your own ESG preferences. Whether you use trackers, active funds or do your own stockpicking with ESG in mind, heavy due diligence is essential.

We have also made some changes to the satellite bond ETFs list, in part to offer more options to investors concerned about the prospect of resurgent inflation. Funds have also exited the list for idiosyncratic reasons, for example a value factor ETF that featured in last year’s list has since closed, forcing us to find an appropriate replacement. Other funds have either been replaced with options that seem much cheaper or more suitable as a play on a certain market, and one ETF has been dropped to make room for an interesting option in another category. In total, we have replaced 12 ETFs from the previous list.

 

Where are the thematic funds?

Thematic funds may be all the rage, but they have only a limited presence in our list, reflecting a desire to keep the focus on ETFs that serve as useful building blocks and core holdings in a portfolio. But that isn’t to say we don’t cover these offerings. As we did last year, we will follow the publication of the Top 50 ETFs list with a separate feature discussing the thematic ETFs that excite our expert panel the most. We will also continue to cover new ETF launches, including thematics, via a quarterly round-up of activity in the space, as well as writing about developments in the space when they occur. From IC columnist Bearbull’s praise of thematics to our discussion of their shortcomings, our previous coverage of this area may also be worth checking.

One of the thematic ETFs in our list is now highly controversial. iShares Global Clean Energy UCITS ETF (INRG) and its non-UCITS equivalent pulled in billions last year, prompting concerns about the stakes the funds had in certain smaller companies and triggering an overhaul of the index they track. As outlined in an earlier article, we take the view that the changes improve this fund and make it a more appropriate way to play a trend that remains appealing. But you may have your own views about recent valuations of clean energy shares, and the fund and its rivals. Either way, the problems this fund encountered in the past year remind us that thematic products require much greater due diligence than standard equity market trackers. Understanding what the fund tracks is crucial, as is the need to monitor any changes.

The same thinking applies to any fund that tracks an index that goes beyond using a simple market cap methodology. Dividend ETFs can lead investors into traps if they simply hold the stocks with the juiciest headline yields, for example. Although we include dividend funds in the list due to their popularity, we stick with the more defensive options introduced in 2020.

A good level of due diligence and understanding is also needed when looking at factor ETFs, a number of which remain in this year's list. While value ETFs have performed well in the cyclical rebound that took off in late 2020, it is worth understanding how they work. Characteristics such as sector neutrality can prevent some from focusing as heavily on cyclical industries as investors might wish. There are also natural trade-offs to such portfolios: minimum volatility factor ETFs may give you a smoother ride at the expense of some gains, for example. We explored these details in the issue of 11 June.

ETF investors in Europe have the advantage of being able to see the fund’s full holdings in most cases. This means that a good level of due diligence is possible.

 

Our criteria

As part of our process, we asked six panelists to assess the list, asking which ETFs provided the best form of exposure to a given market, how competitive their charges were and whether they offered investors good levels of liquidity. Due to the latter two criteria we have often tended to favour bigger ETFs, something that partly explains the notable presence of iShares, the market’s dominant provider, in this list.

If we have dropped an ETF this does not necessarily mean that you should sell or avoid it. And we do not necessarily expect the funds in the list to be the best performers in the near future. Instead, we seek to highlight some of the most interesting and useful building blocks for a portfolio in the current circumstances.

Also remember that passives are not always the best investment vehicle for a given region or asset class. Areas that require a level of selectivity, such as ESG, income and smaller companies, may prove better suited to a more active approach.

There has been one change to our panel. Nutmeg chief investment officer James McManus was unavailable to review the list at the time we were compiling it. So this year Matt Brennan, head of passive portfolios at broker AJ Bell, has joined the panel.

 

 

Discover our selection for 2021 here: 

Core ETFs

Satellite ETFs

Niche ETFs

 

Also take some time to listen in to our podcast on ETFs: