This article is part of Morningstar’s Guide to Investing Ideas for 2016, click here to get your financial health in order with some new year’s resolutions for your portfolio.
Exchange-traded funds (ETFs) are passive funds that provide investors a direct exposure to a particular stock, bond or alternatives index such as the FTSE 100 or UK Property Index. ETF portfolios consist of securities that are traded in the market, just like other open-end funds.
However, the big difference an ETF and other open-ended funds are they are listed on the stock exchange and traded like stocks, which enable ETF to be bought and sold throughout the trading day. ETFs have another significant advantage, they charges a lower annual management fees than other tracker funds; as little as 0.07% per year.
Here are the top five most popular ETFs in December, as chosen by Morningstar readers.
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.
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 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 at 0.25%, with Apple (AAPL) the largest component of the FTSE All-World.
Vanguard S&P 500 UCITS ETF (VUSA)
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.
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 Hortense Bioy said that the fund could serve as a core UK equity holding for investors seeking a regular income stream. It could also be considered as a satellite holding.
iShares UK Property UCITS ETF (IUKP)
The iShares UK Property ETF provides exposure to the UK’s largest real estate investment trusts (REITs) and listed real estate companies with a focus on industrial, office and retail properties, Morningstar analyst Dimitar Boyadzhiev says. Yet UK REIT’s exposure is biased to London and the South East; regions which tend to grow above the national average.
The upbeat property market and ultra-low interest environment of the past few years have helped UK REITs to decrease leverage and strengthen their capital base. However, the main domestic risk for the UK REITs’ outlook is the expected normalisation of monetary policy, Boyadzhiev says. Interest rates could start rising in the next six months and this could weigh on companies’ balance sheets.
Also, Morningstar analysts point out that a fair share of investment in UK real estate comes from abroad such as China, Middle East and Russia. As such, negative developments in these economies may impact investment flows to UK real estate. The fund charges 0.4%.
