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With just few weeks to go before the end of the tax year, investors are looking for potential holdings for their ISA portfolio. Just like actively run funds, exchange-traded funds can be held in an ISA or self-invested personal pension (SIPP) investment wrapper to save tax.
ETFs are passive funds that provide investors direct exposure to a particular stock, bond or alternative assets market such as the FTSE 100 or UK Property index. ETFs charges a low annual management fees than other trackers funds and they also offer investors a wider choice of markets to track. If an asset class or a market had been performed under expectation, a diversified investment like ETFs could minimise the risk. ETFs can be an effective investment vehicle to widen investors’ portfolios exposure at a low cost.
Below, we reveal five of the most popular ETFs as determined by Morningstar.co.uk readers’ monthly clicks and what Morningstar passive fund analysts think of each offering.
The latest figures show investors are researching domestic stocks, suggesting that despite the volatility UK market remains attractive to passive investors.
Also featuring in five of the most viewed ETFs were S&P 500 ETFs; cross referencing with fund flow data from Morningstar Direct reveals investors were selling these – with one particular fund recording outflows of more than €150 million. UK investors should bear in mind that investing in ETFs domiciled in the US is not tax efficient.
Vanguard FTSE 100 UCITS ETF (VUKE)
The fund offers broad exposure to the 100 largest UK stocks, and it is one of the cheapest ETFs tracking the FTSE 100 index charging at 0.09%, says Hortense Bioy, director of Morningstar passive fund research. According to data from Morningstar Direct, the fund saw an inflow of €144 million in January alone. It was the largest inflow in seven months. It shows passive investors’ confidence to large companies listed in the local index despite market volatility at the start of the year.
The index looks fairly well-balanced from a stock perspective, with top sector exposures including financials (19-23%), consumer staples (15-18%), energy (12-16%), healthcare (8-11%), and consumer discretionary (8-11%).
Yet Morningstar analysts remind investors that overall a quarter of the index is made up of resources companies like Royal Dutch Shell (RDSB) and Rio Tinto (RIO) which are reliant on the fortunes of the broader economy and their performance is often directly linked to international commodity prices, which experienced sell-off last year.
Vanguard FTSE All-World UCITS ETF (VWRL)
This Fund seeks to provide long-term growth of capital by tracking the performance of the FTSE All-World Index, a market-capitalisation weighted index of common stocks of large and mid-cap companies in developed and emerging countries. The fund charges 0.25%, with Apple (AAPL) the largest component of the FTSE All-World.
iShares UK Dividend UCITS ETF (IUKD)
This fund offers exposure to the 50 highest yielding UK stocks within the universe of the FTSE 350 index, excluding investment trusts. It is broadly diversified, large and mid cap-focused fund, covering top sectors at the moment that include financials, utilities, consumer defensive, communication services, and energy. It charges at 0.40%. Morningstar analyst Bioy said that the fund could serve as a core UK equity holding for investors seeking a regular income stream.
Vanguard S&P 500 UCITS ETF (VUSA)
This fund saw an outflow of €153 million in January. It was the largest outflow since its operation in 2013.
This ETF provides exposure to the 500 largest companies in the United States, tracking the performance of the S&P 500 index. The index itself covers three-quarters of the U.S. equity market, is market cap weighted and well diversified by sector with the highest exposure to Information technology, financials and health care.
Morningstar passive fund analyst Monika Dutt says the fund can be used as a long-term core holding in a portfolio given its broad exposure. It can also be used as a tactical tool for investors looking to place a short-term bet on the direction of the U.S. equity market. Yet the underlying companies in the index are increasingly generating more revenue from countries outside of the United States, making the ETF’s performance more sensitive to global macroeconomic trends.
ETFS Crude Oil ETC (CRUD)
ETFS WTI Crude Oil ETC provides exposure to the price performance of West Texas Intermediate crude oil through the use of near-month futures contracts. The total cost of holding this product is also 0.99% per year. The ETF saw an inflow of €139 million in January despite the instability in oil price, according Morningstar Direct.
