Passive funds are a low-cost way to get exposure to a broad range of asset classes. They are particularly useful investments to hold in your individual savings account (Isa) as their low management fees, combined with the tax advantages of an Isa, help enhance your returns. They can also be a good option in markets where active managers struggle to beat the main indices, such as the US. And so-called ‘smart-beta’ exchange traded funds (ETFs) provide more tactical approaches within broad markets or mimic active investment styles – again at a lower cost than active funds. We have asked wealth advisers for 10 passive fund suggestions spanning five categories: equities for growth, equities for income, fixed income, smart beta and commodities.
EQUITIES FOR GROWTH
31. Vanguard Global Value Factor UCITS ETF (VVAL)
Alan Miller, founder of wealth manager SCM Direct, suggests Vanguard Global Value Factor UCITS ETF. This fund aims to achieve capital appreciation by investing primarily in companies included in the FTSE Developed All Cap and Russell 3000 indices.
“This is an actively managed global equities ETF that selects shares based on various fundamental measures of value, such as price-to-book, price-to-earnings ratio (PE), estimated future earnings and operating cash flow,” he says. “Its holdings typically have a 38 per cent lower PE and 52 per cent lower price-to-book value than a typical global stock. Vanguard Global Value Factor also has much lower exposure to richly valued tech stocks. These account for just 4.6 per cent of the fund’s assets, versus a typical weighting in a global equities fund of 13 per cent. The ETF charges 0.22 per cent a year, but has quite high transaction costs associated with its active management, which add an extra 0.13 per cent a year to this figure.”
The fund holds 1,155 stocks and its largest geographical exposure is the US, accounting for 56.4 per cent of assets, while Japan accounts for 9.7 per cent, the UK for 7 per cent and Korea for 4.6 per cent.
32. iShares Edge MSCI EM Minimum Volatility UCITS ETF (EMMV)
Emerging markets are one of the most important areas for long-term growth as these economies are developing strongly. But higher growth potential comes with higher risk, because emerging markets often have less stable politics and lower corporate governance than developed economies. So Ben Seager-Scott, chief investment strategist at Tilney Group, suggests iShares Edge MSCI EM Minimum Volatility UCITS ETF as a way of getting diversified emerging markets exposure with reduced volatility.
“This ETF tilts the [MSCI Emerging Markets] index to offer potentially lower volatility in this very high-risk area,” he says. “In effect, this type of fund seeks to take some of the edge out of an area where volatility can be particularly extreme. Although it reduces some of the return expectation – there’s no such thing as a free lunch – I think this trade-off is worth the access it gives to long-term growth potential, hopefully via a smoother ride.”
The fund has an ongoing charge of 0.4 per cent.
EQUITIES FOR INCOME
33. iShares Core FTSE 100 UCITS ETF (ISF)
Mr Miller says: “An attractive area for income is right on our doorstep – the FTSE 100 index. And you can track it via a very cheap ETF such as iShares Core FTSE 100 UCITS ETF, which charges just 0.07 per cent a year, although the extra transaction costs within this ETF amount to a further 0.08 per cent a year. Over the past 12 months this ETF’s distribution yield was 4.07 per cent and its largest holdings are UK household names such as HSBC (HSBA), which accounts for 7.8 per cent of the fund’s assets, Shell (RDSA), which accounts for 10 per cent, BP (BP.), which accounts for 4.9 per cent, plus GlaxoSmithKline (GSK) at 3.4 per cent, Diageo (DGE) at 3.3 per cent and AstraZeneca (AZN) at 3.2 per cent. Many of the companies in the FTSE 100 make significant sales overseas, with an average of about 70 per cent of revenues, so they should benefit if sterling weakens.”
34. BMO Enhanced Income UK Equity UCITS ETF (ZWUK)
Oliver Smith, manager of IG Smart Portfolios, says: “Traditionally investors seeking yield could either invest in high-yielding ETFs that perform in a similar way to a market-cap index, such as the FTSE 100, or put money into less correlated investments that offer some diversification from a market cap index. With the gradual evolution of ETF strategies, there is now a third way via BMO Enhanced Income UK Equity UCITS ETF, which launched in July 2017. This ETF is benchmarked to the FTSE 100, but enhances its yield by around 2 per cent by selling out-of-the-money call options on 50 per cent of the portfolio, giving it an estimated yield of 5.75 per cent. Selling call options can limit capital growth, but for investors who forecast less exciting returns for global indices following nine years of a bull market, this ETF could actually modestly outperform the FTSE 100 in a gently rising market. It is still small in size [at about £5.9m], but with market makers pricing an average bid-ask spread of 0.23 per cent it is easy to trade. Its ongoing charge is 0.3 per cent, making it a cheaper alternative to actively managed funds.”
FIXED INCOME
35. Vanguard Global Bond Index Fund (IE00B2RHVP93)
Peter Sleep, senior investment manager at Seven Investment Management, suggests Vanguard Global Bond Index Fund, which aims for returns consistent with the performance of Bloomberg Barclays Global Aggregate Float Adjusted Bond Index. “This is a very low-risk fund that would be a great core holding for a conservative investor wanting a modest income with limited risk,” says Mr Sleep. “The fund pays a quarterly dividend that results in a yield of around 1.6 per cent after costs. There are more than 9,300 bonds in the fund, including ones issued by developed and emerging countries, as well as large corporations from around the world. So it is truly diversified.” Vanguard Global Bond Index has an ongoing charge of 0.15 per cent.
36. iShares Global Aggregate Bond UCITS ETF (AGGG)
James McManus, analyst at wealth manager Nutmeg, suggests iShares Global Aggregate Bond UCITS ETF, which launched in November 2017. This aims to replicate the return of Bloomberg Barclays Global Aggregate Bond Index. Mr McManus says: “This is a relatively new strategy, but provides phenomenal diversification and value for money as a core holding. The index the ETF tracks comprises more than 21,000 investment-grade securities from across the globe [although the ETF only holds about 1,400 securities], and with a management fee of just 0.1 per cent a year you will keep a good deal of any returns it generates.” The ETF’s largest single country exposures are the US, which accounts for 37.4 per cent of assets, Japan at 17.4 per cent, France at 6.1 per cent, and the UK and Germany, which each account for 5.5 per cent.
SMART-BETA STRATEGIES
37. Xtrackers MSCI World Value UCITS ETF (XDEV)
Mr Seager-Scott suggests Xtrackers MSCI World Value UCITS ETF, which aims to replicate the performance of MSCI World Enhanced Value (USD) Index before fees and expenses. “Of the various factors out there, value is arguably the most established over the long term and is the style favoured by many successful investors who aim to find stocks that are being undervalued by the market,” he says. “It meets my criteria for choosing a factor index – for example, there is clear academic literature supporting it, and a sensible economic and fundamental rationale. And there is every reason to believe it will continue working in the future. This ETF’s relatively low total expense ratio of 0.25 per cent also makes it an attractive option and tracking a world index provides geographical diversification. But investors should be aware that the value tilt skews it away from the MSCI World index weights. For example, it has less in the US and more in Japan compared with the mainstream index.”
38. iShares Edge MSCI World Quality Factor UCITS ETF (IWFQ)
“This ETF tracks an index that aims to reflect the performance of a quality growth strategy,” says Lynn Hutchinson, head of passive product research at Charles Stanley. “Quality growth companies have durable business models and sustainable competitive advantages. So the index this ETF tracks, MSCI World Sector Neutral Quality, selects stocks from MSCI World index with the following factors: return on equity, calculated using the 12-month earnings per share figure and latest book value per share; debt to equity, calculated using the latest fiscal year total debt and book value; and earnings variability, defined as the standard deviation of year-on-year earnings per share growth over the past five fiscal years. The ETF is sector neutral and has the same sector weights as MSCI World index. It holds 299 companies and any dividend yields are accumulated back into the ETF rather than being distributed to investors. It has a total expense ratio of 0.30 per cent and is a decent size with assets under management of $495m (£354.98m).”
COMMODITIES
39. iShares Diversified Commodity Swap UCITS ETF (COMM)
iShares Diversified Commodity Swap provides exposure to a variety of commodity markets by synthetically replicating the Bloomberg Commodity USD Total Return Index. It has exposure to the returns of 24 commodities eligible for inclusion in the benchmark index. “This ETF uses a derivatives contract to track different sector weights,” says Ms Hutchinson. “Energy makes up 39 per cent of its exposure, agriculture represents 27 per cent, industrial metals represent 17 per cent, precious metals make up 13 per cent and livestock totals 4 per cent. It has a total expense ratio of 0.19 per cent, as well as a swap fee for the derivatives contract. But the weighted average swap fee is currently 10 basis points, which is very low compared with some other commodity products. The ETF is a good size with assets under management of $1.2bn, and it is fully collateralised using US Treasury Bills.”
40. Source Physical Gold ETC (SGLD)
“Source Physical Gold ETC is an exchange traded certificate rather than exchange traded fund, but is physically backed by underlying gold bullion held in London and regularly audited,” says Mr McManus. “It has a competitive management fee of 0.29 per cent and is highly liquid, giving efficient exposure to an asset class that would otherwise be difficult for private investors to access in physical format.”
For the rest of our 50 Isa ideas and other associated Isa articles see below:
10 smart ways to boost your Isa
10 investment trusts for your Isa
The cheapest DIY platforms on which to hold your Isa
