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If you are thinking of spreading your portfolio risk, one of the fastest growing financial products is Exchange-Traded Funds (ETFs). Here’s our top 25 ETFs across various sectors…
An ETF is an investment fund that is traded on recognised exchanges. Their stock-like features, cheapness, and flexibility make them extremely useful for investors who direct their own investments. Moreover, ETFs can be included in multiple tax efficient accounts, such as individual savings account (ISA) or Self-Invested Personal Pension (SIPP).
Asset Allocation Within an ETF Portfolio
While ETFs are very useful, potential investors should understand they own risk appetite, needs, and investment goals.
The starting point is asset allocation. How much capital to allocate to equity ETFs and how much to bonds and commodities. The broad asset classes one should consider are:
Within the equity space, you will need to consider this issue:
- Domestic equity ETFs
- Foreign equity ETFs
- Specialised ETFs
And for bonds, the two distinct ETFs are government and corporate bonds. As for commodities, you will meet broad-based commodities ETFs or single-commodity ETFs such as gold ETF.
Which are the best brokers for trading and investing in ETFs?
Here is a quick guide to some of the best UK brokers that offer access to ETFs for trading or investing:
- IG – ETF spread betting
- Saxo Capital Markets – DMA ETF CFDs
- Hargreaves Lansdown – ETF investing
- Nutmeg – Wealth management through ETFs
One of the most popular equity ETF in the UK is the iShares FTSE 100 ETF (ISF). This £6.5bn fund tracks the FTSE 100 Index physically (ie, invest in FTSE 100 shares) and is highly liquid. Other UK-based equity ETFs include:
- iShares FTSE 100 (2000) – ISF
- SPDR FTSE All Share (2012) – FTAL
- Vanguard FTSE 250 (2014) – VMID
- iShares UK Dividends (2005) – IUKD
- iShares UK Small Cap (2009) – CUKS
While an ETF is a good diversification tool, do not hold too many with overlapping constituents. For instance, by holding only ISF and VMID you already have a broad exposure to FTSE 350 stocks. Hence there is no need to buy FTAL (FTSE All Share).
Also bear in mind the type of exposure you wish to have. If income-focussed, UK Dividends (IUKD) is preferred. If you like exposure to small caps, then CUKS may be more suitable.
For foreign equity ETFs, some choices are:
- Vanguard FTSE All World Equity (2012) – VWRL
- Vanguard FTSE All World Dividend (2013) – VHYL
- Vanguard S&P 500 (2012) – VUSA
- Invesco Nasdaq 100 (2002) – EQQQ
- iShares Core MSCI Europe (2007) – ISEU
- xTrackers Stoxx 50 (2008) – XESC
- Vanguard FTSE EM (2012) – VFEM
There is one factor within foreign equity ETFs that you need to pay attention to: Currency fluctuations. Some ETFs offer additional features like currency-hedged, such as MSCI Japan GBP Hedged (XMJG). But these ETFs may entail a higher operation costs.
Single-country equity ETFs add another dimension to the selection. Xtrackers CSI 300 ETF (RQFI), for example, tracks China’s largest stocks as defined in the CSI 300 Index. These passive ETFs compete with some unit trust such as the JP India IT (JII) or Fidelity China Special Situations (FCSS).
On investment theme ETFs, there is a growing number of selection, ranging from energy-related to quantitative ones. The latter gained a wide following with their ‘smart beta’ ETFs. Some selections include:
- iShares Edge MSCI World Momentum Factor (2014) – IWFM
- MSCI EMU Socially Responsible (2011) – UB39
- iShares Clean Energy (2007) – INRG
- iShares Automation and Robotics (2016) – RBTX
Bonds & Fixed Income ETFs
For bond ETFs, the first port of call is iShares Core UK Gilts (IGLT), which tracks the FTSE Actuaries UK Conventional Gilts All Stocks Index. But you can spread the risk by buying other gov bonds with the iShares Global Govt Bond ETF (SGLO). This funds invests in other G7 gov bonds.
If you wish to gain acquire more risk, then emerging market bonds (SEMB) and lower-quality corporate bonds (RISE) are two potential ETFs to include in your portfolio.
- iShares Core UK Gilt (2006) – IGLT
- SPDR Bloomberg Barclays 1-5 Year Gilt (2012) – GLTS
- iShares Sterling Index-Linked Gilts (2006) – INXG
- iShares Corporate £ Bond (2004) – SLXX
- iShares Global Govt Bond ETF (2009) – SGLO
- iShares JPM $ EM Bond ETF (2008) – SEMB
- iShares Fallen Angels HY Corp Bond (2016) – RISE
In the UK, the most popular commodity ETFs are precious metals and energy. The latter, however, is very speculative due to the rollover costs associated with its investment strategy. Hence gold and silver ETFs are preferred.
- Invest Physical Gold (2009) – SGLD
- ETFS Physical Silver (2007) – PHAG
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Jackson has over 15 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.