Top five ETF investment trends
Exchange traded funds or ETFs offer investors access to a vast array of different markets, sectors and geographies. Here we look at what’s trending, including ethical, technology, currency-hedged and multi-asset ETFs.
The last few years have bucked a lot of trends. Geopolitical risk has moved from emerging markets to developed markets, interest rates have reached their lowest ever levels in the UK, and the once-lucrative property market has stalled. As a result, it has become harder and harder to anticipate the next big investment story. The supposed ‘safe havens’ of equities, banks and property suddenly carry an element of risk, forcing investors to look elsewhere for inflation-beating returns.
Exchange traded funds (ETFs) have proven extremely popular among these types of investors, as they offer access to a vast range of different markets and sectors, at comparatively low fees. However, some ETFs have grabbed attention more than others.
Here are five of the top ETF investment trends of 2017 so far.
- Ethical ETFs
These ETFs give exposure to companies and assets deemed to be socially responsible and usually environmentally friendly. Investing in these sorts of assets is sometimes known as impact investing, responsible investing or ESG (environmental, social and governance) investing. There is an ethical ETF for every cause. For instance, the SPDR SSGA Gender Diversity Index ETF1 invests in large-cap and mid-cap companies which have a high percentage of women in leadership positions. The iShares MSCI ACWI Low Carbon Target ETF2 invests only in companies which have low carbon emissions. And the iShares MSCI Global Impact ETF3 invests in firms which ‘derive a majority of their revenue from products and services that address at least one of the world's major social and environmental challenges as identified by the United Nations Sustainable Development Goals.’
While ethical ETFs are particularly popular among younger retail investors, they have also seen a lot of interest from sovereign wealth funds and pension funds which may wish to reflect the values of their respective governments or corporations. However, while they may be socially aware, these funds are not charity cases.
‘There is a slight movement at the moment towards socially responsible ETFs,’ says Oliver Smith, portfolio manager at IG. ‘And the way that they are being constructed nowadays means that you don't necessarily have to compromise on performance.’
Read more: Six of the best socially responsible ETFs
- Technology-focused ETFs
If time travel existed, every investor would go back and buy up Apple stock in the early 1980s, Adobe in the early 1990s, or Electronic Arts in early 2016. When tech stocks go up, they tend to skyrocket. So, it’s no surprise to see technology-focused ETFs gaining traction at the moment. A number of ETFs focus on high-growth and ‘disruptive’ technology companies.
However, the rapidly changing tech landscape and fierce competition for market share means that these stocks can just as easily go down as up.
While technology-themed ETFs are popular among growth-seeking investors, it is worth remembering that approximately one fifth of the S&P 500 index is made up of tech-focused stocks, and some of the largest corporates in the world (think Google, Apple, Tesla) fall under the tech bracket. It is very possible to invest in technology without deviating too far from the mainstream, or taking on excess risk.
Read more: FANG: who are they and should I invest?
- Multi-asset ETFs
One of the big draws of investing in an ETF is that they can offer instant portfolio diversification for extremely low fees. Most people choose to invest across a number of ETFs, to take advantage of a range of different sectors and markets. However, investors looking for a low maintenance portfolio simply go straight for the multi-asset funds.
Alone, multi-asset ETFs are a bit like all-in-one portfolios. And when used alongside other index-themed ETFs, they can offer uncorrelated returns for investors.
Multi-asset ETFs can be seen as an alternative to index-focused ETFs for investors who are worried about long-term stock market performance in the US and UK. Their ongoing popularity has meant that there are now multi-asset funds for every possible investment strategy – from high income4 to diversified alternatives5 and aggressive allocation.6
All the ETFs described can be bought on IG’s share dealing platform, where commissions start at just £5 and there are no custody or platform fees. If you are looking for exposure to other asset classes, use our ETF screener to find the right ETFs for you.
- Currency-hedged ETFs
This is one of the most complex ETF trends, but it is becoming more and more commonplace. It is essentially an investment strategy that protects investors against foreign exchange fluctuations — a concern that has escalated in the UK over the past year thanks to the falling value of the pound in the wake of the Brexit decision.
As the pound has fallen, the dollar and the euro have become stronger, which means that any US-based investor with exposure to UK-based stocks stands to potentially lose some of their returns in exchange fees. Similarly, UK-based investors with exposure to emerging or frontier markets are putting themselves at risk of sudden currency movements due to natural disasters or regime change.
While professional investors have been working to counteract the risk of currency devaluation for years, retail investors are only now starting to see the benefits.
‘The great benefit we see with currency-hedged ETFs is that they really do help to lower your portfolio volatility,’ says Smith. ‘So it's quite a good risk tool.
‘If you take a lot of retail investors — and even people who believe they are quite experienced - they think that if you buy a Japanese ETF in sterling, that they have exposure to sterling and not the yen. But of course, that's not true.
‘However, currency hedging is quite difficult. It's not something you can go into blindly.’
Smith adds that around half of the S&P 500 companies are based outside of the US, so index-tracking investors are less exposed to currency fluctuations than they might think. Furthermore, currency-hedged ETFs tend to have slightly higher fees than other ETFs, so they may not be suitable for everyone.
- The ‘elephants’
The big index-tracking ETFs have never been more popular. In fact, analysts have begun to describe the most popular FTSE 100 and S&P 500 ETFs as ‘elephants,’ due to their sheer size. The iShares Core FTSE 100 UCITS ETF has net assets of more than £4.8 billion,7 and had returned 13.99% in the year ending 31 July 2017. On the other side of the pond, the Vanguard S&P 500 ETF8 has total net assets of more than $338.3 billion and a one-year return of 16% in the year ending 31 July 2017.
The combination of high inflows and double-digit returns can prove irresistible to investors, so these big ETFs are likely to remain popular for the foreseeable future. Or at least until the next stock market crash.
Read more: Six of the best US ETFs