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Top 50 ETFs 2018

We reveal our updated selection of 50 core building-block ETFs for use in all types of portfolios
May 24, 2018

This year marks the fifth edition of Investors Chronicle’s Top 50 exchange traded funds (ETFs) – the funds we think could make useful building blocks in your portfolio. Each year we run through what’s available in the ever-changing ETF industry and pick out a mix of core, long-term, buy-and-hold funds alongside some more esoteric ETFs that could help your portfolio returns.

We have made 14 changes to the 2017 selection of 50. These were either to directly replace funds after the emergence of a better rival or simply because we no longer had conviction in the ETF’s ability to add value to a portfolio. Factors considered included analysis of recent performance, changes to fees, liquidity, the benchmark being tracked and the fund’s ability to track its index.

As ever, we have maintained a bigger focus on the largest equity markets, where it is more difficult to find the right active manager to provide outperformance. So we have core options for all the major equity sectors, and supplement this with more innovative ETFs to provide income, value tilts or access to more concentrated indices that provide a sector or style focus. This year also includes an ETF product that uses underlying active stockpicking rather than tracking a benchmark.

We have also rejigged the composition of our bond ETFs to provide a broader range of core investments, and built on our 2017 addition of ethically-focused equity ETFs.

To come up with our final list we weighed up metrics including index quality and composition, fund liquidity, fund size, trading costs, total returns, tracking difference, and of course ongoing charges. The final selection of ETFs is based on a mix of these factors. Sometimes we have chosen a more expensive ETF because it is better at tracking its index and is larger and more easily tradeable. In other situations we selected a smaller ETF as it tracks a better index or its lower ongoing charge will be more beneficial over the long term.

However, 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.

All of the 50 choices take account of the total cost of ownership, and balance this with the likely performance relative to the market, index and other products. We also consulted a panel of experts for their views on the best funds, the best markets to use ETFs in and the best benchmarks to use in these areas.

Our starting point this year was looking at the performance and tracking difference of the 50 ETFs in the 2017 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.

The final 50 have been chosen because we believe they provide the best value, accounting for the various factors mentioned.

We have continued to lean towards the most straightforward fund structures and have prioritised physically replicating ETFs where possible.

However, just because we have dropped an ETF does not mean we think you should sell or avoid it. Please do 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.

This year our panel consisted of:

■ Irene Bauer, chief investment officer at Twenty20 Investments

■ Hortense Bioy, analystat Morningstar

■ Lynn Hutchinson, assistant director at Charles StanleyPan Asset

■ David Liddell, chief executive at IpsoFacto Investor

■ James McManus, investment manager at Nutmeg

■ Ben Seager-Scott, chief investment strategist at Tilney Group

■ Peter Sleep, senior portfolio manager at Seven Investment Management

■ Oliver Smith, portfoliomanager at IG

■ Paul Taylor, managing director at McCarthy Taylor

 

To view the IC Top 50 ETFs 2018 by category, please click on the links below:

UK equities (four ETFs)

US equities (six ETFs)

European equities (six ETFs)

Japanese equities (four ETFs)

Global equities (six ETFs)

Asian equities (three ETFs)

Emerging market equities (four ETFs)

Ethical equities (three ETFs)

Government bonds (six ETFs)

NEW: Sterling corporate bonds (two ETFs)

NEW: Global bonds (three ETFs)

Commodities and precious metals (three ETFs)

 

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