UK EQUITIES (TWO ETFS)
Vanguard FTSE 250 UCITS ETF (VMID)
As one panellist put it, this Vanguard FTSE 250 ETF stands out because it is “cheap and does what it says on the tin”. The fund provides exposure to a popular mid-cap market at a low cost of 0.1 per cent.
With £1.6bn in assets, it is much larger than both an equally cheap Xtrackers product and an iShares ETF that was once superior in terms of size.
New: SPDR S&P UK Dividend Aristocrats (UKDV)
Some on the panel wanted to avoid UK dividend ETFs outright, but the sheer popularity of such strategies means we have instead looked for the most defensive option available.
One name that stood out here was SPDR’s S&P UK Dividend Aristocrats ETF. Rather than simply targeting the highest-yielding companies, this ETF invests in companies with a long record of dividend increases. This adds a level of security to some of the dividends the ETF is exposed to, as businesses with a reputation based on longstanding payments could prove more hesitant to make cuts.
However, we would stress that this approach is not a silver bullet. The fact that even some well-financed names with long track records are cutting dividends out of prudence means that this ETF could still take some pain, but it looks less risky than IUKD’s approach at this point. This is also a reasonably large ETF with a lower fee than the iShares product.
Dropped from the 2019 selection:
iShares UK Dividend UCITS ETF (IUKD)
Favoured by many investors for its attractive level of equity income, the UK market has run into trouble amid a slew of dividend cuts and suspensions. Link Asset Services has predicted that UK dividend payouts for 2020 could be down by between 27 and 51 per cent from 2019’s total of £98.5bn.
In this context, our panellists have grown concerned about the focus of this ETF, which invests in 50 higher-yielding companies from the FTSE 350. Because dividend yields move inversely to share prices, it may well find itself exposed to companies that are cheaply priced either because they are struggling or because investors fear they will cut their dividends. These troubles are evident from some of its recent holdings: on 28 May the ETF’s 20 biggest positions included Royal Dutch Shell, which has cut its dividend for the first time since the second world war, and insurer Aviva, which recently announced a suspension of its payouts.
Because retail investors are so enthusiastic about equity income, we have continued to include what we judge to be the best dividend ETFs in the list. But in recognition of the elevated risks in the equity income space, we have moved all dividend ETFs into our satellite category, as well as replacing riskier plays like this with more defensive products.
US EQUITIES
iShares S&P SmallCap 600 UCITS ETF (ISP6)
Smaller companies were hit harder in the coronavirus sell-off than their large-cap peers, but it is worth looking down the market cap scale for the sake of both diversification and growth potential. And when it comes to US smaller companies, this option continues to stand out because of its underlying index. The S&P SmallCap 600 is designed to ensure stocks are liquid enough to be held within an ETF.
As we discussed last year, this ETF is not the cheapest, with a 0.4 per cent charge. But its robust methodology, combined with the ETF’s scale, continue to impress us.
Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ)
At a time when big tech companies appear to be consolidating their position as market leaders, this ETF retains its appeal as a play on high-growth businesses. The Nasdaq 100 index tracks the biggest non-financial US stocks, leading it to big allocations in the technology, telecommunications and consumer discretionary sectors. The FAANG stocks, Microsoft (US:MSFT), Intel (US:INTC) and Cisco Systems (US:CSCO) were among the ETF’s top 10 holdings at the end of April.
iShares continues to offer a larger rival product, but the Invesco ETF charges slightly less and has more than ample assets and liquidity. Investors may also like the chance to diversify in terms of which ETF providers they use.
iShares Edge S&P 500 Minimum Volatility UCITS ETF (MVUS)
This ETF has not covered itself in glory, falling roughly in line with the main S&P 500 index during the sell-off and slightly lagging behind as prices have recovered. However, its characteristics may still appeal to some.
As we noted, the biggest US tech companies have held up relatively well in the crisis, and have led the recent market recovery. But their shares could be vulnerable to any resumption of volatility, while some of the FAANG companies themselves remain exposed to regulatory pressures in future.
This minimum volatility ETF has less exposure to the likes of the FAANGs than the main index, which in part explains its underwhelming performance. Investors looking to take a slightly contrarian position by underweighting these leading stocks within their US exposure may still be tempted to use this fund.
New: Fidelity US Quality Income (FUSD)
This ETF stood out as an equity income option because of its conservative methodology. Rather than just chasing high yields or seeking out businesses with the longest dividend track records, Fidelity US Quality Income focuses on large- and mid-cap dividend-paying companies with robust fundamental characteristics.
Index constituents are screened using metrics such as free-cash-flow margins, the return on invested capital and free-cash-flow stability. As such, investors are getting some benefit from dividends, but also enjoy a more defensive, total return approach.
We would add a note of caution that some robust companies could (and have) cut dividends out of prudence, so this ETF is not entirely shielded from coronavirus-induced troubles.
Dropped from the 2019 selection:
SPDR S&P US Dividend Aristocrats UCITS ETF (USDV)
Dividend pressures are less of a concern in the US than they are closer to home. US equities have traditionally offered a much lower yield than other markets, and those dividends that are on offer look safer than those in the UK. Janus Henderson’s Global Dividend Index for May 2020 notes that 79 per cent of US payouts should be safe this year, although companies may carry out fewer share buybacks as they move through the coronavirus crisis.
However, risks do exist. And while this ETF arguably has a more defensive approach than those that invest based purely on high yields, some on the panel worried its methodology may not prove as robust as others available in this category. It focuses on companies that have increased dividends every year for at least two decades – but as we noted, even those with such an impressive record could be caught out by the challenges of the coronavirus crisis.
GLOBAL EQUITIES (FOUR ETFs)
iShares MSCI World Small Cap UCITS ETF (WLDS)
Our panel had no complaints about this ETF, which remains an attractive prospect when it comes to cost and liquidity. It has a charge of 0.35 per cent and the fund has more than $1bn in assets across its various share classes. Small-cap investing can often mean elevated risks, so the fact that the underlying index is diversified across more than 3,000 holdings will come as a relief to some.
iShares Edge MSCI World Minimum Volatility UCITS ETF (MINV)
This ETF’s strategy has held up better than its US counterpart's this year, registering less of a loss than the mainstream MSCI World index. Cautious investors, and those with a slightly contrarian bent, may again be tempted by a satellite position with less of a focus on the current market leaders. This ETF, for example, has slightly less exposure to the US than a regular MSCI World tracker.
Investors will pay extra for this differentiation, with the 0.3 per cent charge making this product more expensive than a vanilla global equity ETF. But in uncertain times, you may be willing to pay up for something different.
As with other global products, do remember the risk that you might be duplicating positions held via regional funds.
Vanguard Global Value Factor UCITS ETF (VVAL)
The value investment style has continued to take a drubbing this year, with few obvious signs of a decisive comeback. But the need for diversification, and the fact that some investors will feel doubtful of the recent market rally and wish to go against the grain, has compelled us to stick with last year’s value ETF picks for the time being.
This ETF continues to stand out on some of the usual metrics, given its low cost and good levels of liquidity. But eagle-eyed readers will note that this is, in fact, an actively managed fund. Vanguard uses quantitative analysis to pick stocks based on criteria such as their prices and estimated future earnings.
New: Fidelity Global Quality Income UCITS ETF (FGQI)
Taking a global approach to dividend investing is a good way to mitigate some of the challenges that have become most obvious in the UK market, but no region is entirely safe from the pressures of the coronavirus crisis. As such, we have again erred on the side of caution here, replacing a Dividend Aristocrats ETF with the quality-biased Fidelity product.
The composition of global indices means that investors will get hefty exposure to the lower-yielding but better-performing US equity market, but the ETF takes in plenty of other markets, from Japan to the UK, Europe and Australia. The fund has a decent level of assets and a 0.4 per cent charge.
Dropped from the 2019 selection:
SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)
In keeping with our thinking for regional dividend ETFs, we have opted to back what we deem to be the most defensive global option available. And while the Dividend Aristocrats focus on track records may provide one level of safety around certain payouts, we believe a better choice exists in these uncertain times.
JAPANESE EQUITIES (ONE ETF)
iShares MSCI Japan Small Cap UCITS ETF (ISJP)
The panel still views this as a standout product when it comes to tracking Japanese smaller companies – although this in part relates to a lack of competitive alternatives. WisdomTree, for example, offers a Japanese small-cap ETF, but this has much less in the way of assets.
The iShares offering is large and liquid, with a broad underlying index that tracks nearly 1,000 companies. However, this ETF still looks far from cheap, with a 0.58 per cent charge.
EUROPEAN EQUITIES (TWO ETFS)
iShares Edge MSCI Europe Value Factor UCITS ETF (IEFV)
The usual caveats about value investing apply to this pick, but it continues to stand out in its field because of the exposures investors are getting. Unlike many European equity funds and ETFs, this product includes an allocation to the UK – important because, as we noted last year, getting exposure to UK value stocks via an ETF can be a difficult task. This ETF’s index also offers a reasonably wide range of different geographical exposures. It charges 0.25 per cent – not unreasonable for a factor ETF – and has significant assets.
New: Fidelity Europe Quality Income UCITS ETF (FEUI)
We have again opted for a dividend strategy that seeks out financially robust companies to provide a layer of protection for equity income investors. Like the other offerings in this product range, Fidelity Europe Quality Income has an attractive 0.3 per cent fee.
This is arguably the Fidelity dividend ETF that may raise the most questions, because it has a limited level of assets under management so far. But it could well take on more money if dividend investors look for a more cautious approach, and benefits from being part of a wider product range that has fared well.
ASIA PACIFIC EX JAPAN EQUITIES (ONE ETF)
SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (PADV)
This ETF remains the most attractive prospect in its field, in part because of a lack of alternatives. A lack of competition has also meant little pressure on prices, with this product charging a fairly high 0.55 per cent fee.
However, it may still be worth considering as a satellite income play: Asia could well bounce back from the current crisis quicker than other regions, while economic growth and corporate improvements could result in a rosy outlook for dividends. And as we noted, a focus on companies with a good track record of increasing dividends does add a level of reassurance, even if it is no guarantee that payouts will keep rising.
EMERGING MARKET EQUITIES (THREE ETFS)
iShares Edge MSCI Emerging Markets Minimum Volatility UCITS ETF (EMV)
Unlike some other minimum volatility ETFs, this product has fared well versus the mainstream market in what has been a turbulent year. And investors may be especially tempted to take a minimum volatility approach here, given that emerging markets can be a racier investment than other regions.
This iShares product takes the same approach as the others in the same range. It does charge a slightly higher fee than the others, but investors may value such an approach here.
SPDR MSCI Emerging Markets Small Cap UCITS ETF (EMSM)
A high-octane option, this may nevertheless appeal to those with a long-term mindset and an appetite for risk. The fund is not huge in size, but does offer exposure to a very broad range of companies, with 1,517 holdings in the underlying index towards the end of May. The 0.55 per cent charge means this is not the cheapest ETF, but some of this is understandable given the specialist area it focuses on.
Xtrackers Harvest CSI300 UCITS ETF (RQFI)
A promising but risky play, this ETF stands out because it grants investors access to Chinese mainland stocks (A Shares), which were only recently included in MSCI indices. The CSI 300 ETF index includes businesses from the Shanghai and Shenzhen stock exchanges, with a focus on the biggest and most liquid equities in these markets.
The specialist nature of this ETF, combined with its good liquidity, goes some way toward justifying the steep 0.65 per cent ongoing charge. But the risky nature of the market in question means investors should not overlook active funds, or funds that allocate to China as part of a more diversified approach, as an alternative option.
BONDS (THREE ETFS)
Invesco US Treasury Bond 7-10 Year UCITS ETF (TRXG)
Investors looking to diversify their government bond exposure beyond the UK can also turn to US Treasuries, which generally held up well in this year’s sell-off. This ETF, which focuses on one of the most popular parts of the Treasury market, stands out both in terms of its significant scale and a very attractive price of just 0.06 per cent.
As with some of our satellite options, you should remember the risk of overlap with the core ETFs. AGBP has a good chunk of its assets in the US government bond market. This satellite option, instead, gives more targeted exposure.
iShares Fallen Angels High Yield Corp Bond UCITS ETF (RISE)
The ETF that generated the most enthusiasm among this year’s panel, this product looks to generate yield and returns from 'fallen angel' bonds, which have been downgraded from investment-grade to high-yield status. Such bonds tend to be oversold as a result of their downgrade, but often retain an element of quality.
With many well-known companies, from Ford (US:F) to Kraft Heinz (US:KHC), seeing their debt downgraded amid the coronavirus crisis, the fallen angel market has grown markedly and could offer plenty of opportunities. It is not without risks – some downgrades may well prove to be justified, while fallen angel bonds tend to have longer maturities, and thus could be more sensitive to moves in interest rates. But investing in line with this theme in a diversified way could pay off.
This iShares ETF continues to appeal on various fronts. It is large and liquid, has a broad array of bonds, with around 460 bonds in early June, and recently offered a yield of around 4.5 per cent. The 0.5 per cent charge makes sense, given the specialist nature of this offering.
New: iShares JPMorgan $ EM Bond UCITS ETF (EMHG)
At a time when 'safe' bond yields have collapsed, interest rates have been slashed and equity dividends are coming under pressure, brave income investors might find themselves turning to riskier parts of the market. Emerging market debt is one option, but the uncertainties of the Covid-19 era could mean the risks are especially elevated.
While no guarantee of safety, emerging market debt denominated in 'hard' currencies has tended to be less volatile than local currency bonds. This iShares ETF stood out as a route to hard currency exposure, given its substantial assets and broad focus. The fund’s underlying index has around 500 bonds and can hold both government and corporate debt, although it recently had a heavy skew towards the former. The 0.5 per cent charge makes this product slightly cheaper than the emerging market debt ETF included in last year’s list.
Dropped from 2019 selection:
SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF (EMDL)
This ETF still does its job, but we are dropping it in favour of a product that focuses instead on hard currency emerging market debt. Local currency debt can prove more volatile, and we are opting for something slightly more stable in what could be a challenging time for some developing economies.
To view the Top 50 ETFs 2020, click below:
