This marks the seventh edition of the Investors Chronicle Top 50 ETFs report, highlighting the exchange-traded funds (ETFs) we view as the most useful low-cost building blocks for an investment portfolio. Predominantly passively managed, these products could be used in their own right or sit alongside active funds and individual stocks in a portfolio.
We have maintained the structure introduced last year, with ETFs falling into three broad categories, both for simplicity and to reflect investor priorities. The ETFs in our list are categorised as Core (buy and hold), Satellite (growth and income boosters) or Niche (specialist). Our list remains biased towards equity ETFs, reflecting where the bulk of returns tend to stem from, with a limited selection of fixed income products on offer.
This year’s changes
We have made some notable structural changes this year. Dividend ETFs may be a popular part of this list, but the outlook for such products has deteriorated significantly amid the coronavirus lockdown. Many companies have already cut, cancelled or postponed their dividends and these payouts will remain under severe pressure for some time: Janus Henderson, the fund provider, has predicted that global dividends could decline by between 15 and 35 per cent this year. Chasing dividend yields comes with big risks, especially in a passive format.
Bearing in mind how popular they can be among income-oriented investors, we have kept what we judge to be the best dividend ETFs in this year’s list. But in recognition of the uncertainties surrounding these products we have moved them from the Core category to Satellite and dropped some of last year’s choices in favour of products with a more defensive methodology.
The core equity categories also look slightly different because the vast majority of these now include an ETF with an ESG twist. ESG strategies are gaining mass appeal, and have confounded some critics by performing well in their first major market sell-off earlier this year.
In recognition of investor demand we have included some core ESG equity options. For now, we are opting for products with a light ESG slant, but do not deviate too dramatically from mainstream markets, although our choices could change as this part of the market evolves over time.
A total of 12 products have been removed from the list, although much of this is down to the aforementioned dividend ETF changes, as well as more niche ESG strategies being removed to make way for mainstream options.
Staying the course
We have made a handful of tweaks elsewhere, including the removal of one bond fund to make way for an option that may prove useful if inflation makes a comeback in the wake of major fiscal stimulus around the world.
But broadly the panellists who assist with the construction of the list were content with many of last year’s selections, especially the core options. Our choices have been dictated by criteria including the ETF’s size and liquidity, how competitively priced it looks, and whether it uses the best index and methodology for the relevant market. Many of our core choices continue to stand out versus their peers. This has meant that iShares, the dominant ETF provider, is notably present once again, as it remains difficult to deny the quality and scale of the company’s products.
Some satellite options may appear to go against the grain. Value funds have continued to struggle, for example, while minimum volatility ETFs with good levels of exposure to the US have recently lagged in a market dominated by the big tech stocks. But these names have kept their place in the list to cater for investors who want a degree of diversification away from the leaders of what has been an unusual market rally, and for those with a contrarian bent.
Finally, those perusing the list will see that we have maintained a fairly short list of thematic ETFs, even as this market and the demand for such products continues to grow. This reflects the constraints of the list in its current format rather than our view on thematic investing. Our panellists provided us with a number of compelling ETF suggestions, but expanding this category would require us to cut many worthy products from other parts of the list. As such, we have stuck with last year’s four-strong thematic cohort, but will increasingly look into thematic ETFs (and other thematic funds) in our personal finance coverage.
As part of our process, we asked the panellists to consider which ETFs provided the best form of exposure to the relevant market, how they compared with rivals on cost and whether they stood out in terms of liquidity. We have broadly favoured larger ETFs, which should theoretically provide a good secondary market and be easy to trade. In some growing areas such as ESG, we have backed some smaller names that have the potential to take on greater assets in time. As there is no one metric that determines the best ETF, we have accounted for a balance of different factors.
If we have dropped an ETF this does not necessarily mean we think you should sell or avoid it. Also, do bear in mind that this is not a suggestion to buy every ETF mentioned, nor is this a list of the 50 ETFs we judge to be the best performers in the near future. The premise of the Top 50 is to provide a succinct list of what we see as the best possible ETFs across different asset classes and styles of investing.
As with any set of investments, you should be wary of duplicating holdings. For example, some names in our core equity categories will access the same, or similar, markets. Often, core ETFs with a broad focus (such as the FTSE All-Share tracker in our UK category) will have a degree of overlap with some satellite names (in this case, a FTSE 250 tracker). In instances like this, the satellite option promises more targeted exposure to a specific area that may offer better long-term returns, but you can find yourself doubling up to an extent by buying both ETFs.
Finally, note that ETFs, and passives more generally, might not be the best investment vehicle for every region and asset class. Dividend ETFs, for example, may offer you a less selective dividend approach than active equity income funds or even picking your own stocks. And passive fixed-income funds tend to have higher levels of duration, or sensitivity to interest rates, than their active counterparts.
To view the Top 50 ETFs 2020, click below: