Investors are clamouring for income – at least that’s what the top 10 ETFs on Morningstar.co.uk are suggesting. Developed market equities are topping the bill, but there is a definite slant towards those which offer up a yield. ETFs which construct their portfolio based on dividend pay-outs feature twice in the top 10 – and it is the income paying share class of the iShares FTSE 100 ETF that makes the list, rather than the accumulation class.
Also popular is a property fund which has managed an impressive annualised return of 15% over the past five years, which tallies with the fund flows seen in active management towards the asset class.
SPDR S&P 500 ETF (SPY)
This four star rated ETF is the most popular among Morningstar readers, and offers investors diversified exposure to U.S. large-cap stocks. However Morningstar ETF analyst Michael Rawson says there are better S&P 500 funds available.
“SPY is the most heavily traded security in the world. This liquidity makes it very cheap to trade in large blocks, which attracts institutional traders and further lowers trading costs for the average investor,” he says. “While the fund sports a low expense ratio, structural issues hinder its efficiency.”
iShares UK Dividend ETF (IUKD)
This ETF offers exposure to 50 highest yielding UK stocks, with a focus on large and mid-sized companies. It could serve as a core holding in an income investor’s portfolio – but Morningstar ETF analyst Hortense Bioy warns investors to check the constituents before investing as the ETF has a heavy bias towards financials, which account for 35-40% of the portfolio weighting.
“Weighting by dividend yield rather than market capitalisation results in a tilt towards smaller and deeper value companies,” she adds. “Historically, value stocks have offered better risk-adjusted returns than their growth counterparts but can remain out of favour for years.
Vanguard FTSE 100 ETF (VUKE)
The fund provides broad exposure to large cap UK equities and can be used as a core holding. Investors should bear in mind that the FTSE 100 index consists predominantly of global players, with more than 70% of the revenues of FTSE 100 companies coming from outside the UK.
Vanguard S&P 500 ETF (VUSA)
This five-star rated ETF has delivered spectacular performance in 2013 and 2014 –but failed to excite year to date returning only 1%. The ETF uses full physical replication to capture the performance of the S&P 500 Index, less fees, which at 0.07% are at the low end of the range for ETFs with exposure to the U.S. large-cap equity market.
Vanguard FTSE All-World ETF (VWRL)
This ETF 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.
iShares FTSE 250 ETF (MIDD)
This fund uses physical replication to track the performance of the FTSE 250. Investors should however keep in mind that mid-cap shares tend to be more volatile than their larger counterparts. Studies have shown that over the long term mid-sized companies outperform megacaps, but growth investors should bear in mind that they are also often more sensitive to economic health.
iShares UK Property ETF (IUKP)
The iShares UK Property ETF provides exposure to real estate investment trusts (REITs) and listed real estate companies in the United Kingdom – not real bricks and mortar. This is a much more liquid way to play the property market, but also means that this ETF will have much greater correlation to equity markets than a fund which invests directly in commercial or residential property.
Vanguard FTSE All-World High Dividend Yield (VHYL)
This ETF seeks to track the performance of the FTSE All-World High Dividend Yield Index, market capitalisation weighted index of common stocks of companies, excluding real estate trusts, in developed and emerging markets that pay dividends that are generally higher than average.
iShares Core FTSE 100 ETF (ISF)
This fund is part of iShares “Core” range of the most well known and most commonly used equity and bond markets in the world, at the lowest possible cost. The fund has a total expense ratio of 0.07%, which is one of the cheapest ETFs providing exposure to the UK large-cap equities on the market.
iShares Core MSCI World ETF (IWDA)
This ETF provides exposure to the largest publicly-traded companies in the world. The MSCI World Index, a widely used barometer for the global equity market, includes stocks from developed countries, but excludes emerging market ones.
“Given its broad exposure, the fund can be used as a long-term core holding in a portfolio,” said ETF analyst Monika Dutt.
“Although the MSCI World Index is broad in geographic scope, the United States accounts for almost 60% of total portfolio allocation. Pairing this ETF with another U.S. equity fund may result in significant overlap, but combining it with an emerging markets fund instead will lead to greater portfolio diversification.”
