Picking an ETF for your portfolio
Choosing which exchange traded fund (ETF) to invest in gets more difficult every year. Market growth has seen a proliferation of ETF strategies (some good, others not so good) muddying the waters for many investors. IG’s ETF Screener is a great help, but it still takes a lot of research, even for professional investors, to decide which ETFs to trade in their portfolios.
This 2018 edition of IG’s Top 50 ETFs aims to clear up some of the confusion, by selecting ETFs under the following categories:
- Core portfolio building blocks
- Secondary indices
- GBP currency hedged
- Equity ETFs for income seekers
- Smart beta
As we have previously written, trying to own the ‘best ETF’ in its space can be largely academic, as market pricing often has a much larger impact on your total return than picking the ETF with the lowest management fees or tightest index replication.
Therefore you should not see this as being a ‘best of the best’ list, but rather one that is a dependable source of ideas for making investments. In many of the categories there are similar ETFs that could perform just as well for your portfolio. Nonetheless, all the ETFs listed here are undoubtedly amongst the leaders in their space.
Click here for IG's complete list of top 50 ETFs 2018 (pdf)
The following guidelines explain how the list was compiled:
1. Every ETF can be bought with GBP
Investing in GBP share classes cuts down on foreign exchange fees, which can be many times higher than the dealing costs, and can eat into your returns.
If you do wish to trade non-GBP assets, IG charges just 0.3% for FX fees, compared with 1%, or even 1.5%, for well-known competitors. This can save up to £120 on a £5000 round trip with an investment that is bought and subsequently sold.
2. ETFs that distribute income given precedence over total return ETFs
For investments held outside ISAs and self-invested personal pensions (SIPPs), this makes it easier to work out income tax and secondly, it gives readers an indication of what the asset class yields.
Nevertheless, owners of fixed income ETFs should refer to the ETF factsheet to establish the yield to maturity, as this can be significantly different from the dividend yield.
This is the annual cost to the investor of owning the ETF. Products tracking the most widely held indices, such as FTSE 100, S&P 500 and UK gilts are subject to intense pricing competition, and are cheapest to own.
Low management fees are a boon to investors, but there are other factors to take into account.
4. Average bid—ask spread
Because ETFs are traded on the stock exchange, they have a bid-ask spread like normal shares. The bid-ask listed is the average spread over two years, as reported by Bloomberg. The wider the bid-ask spread, the more frictional cost there is to trade in and out on a regular basis. This is determined by the asset class, as well as the number of firms making a market in the security.
Bid-ask spreads are not a disadvantage of ETFs: there is no stamp duty (UK rate is 0.5%) payable on ETFs, and they also avoid the creation and anti-dilution levies that occur when investing in funds.
While the 50 ETFs here cover the majority of asset classes that investors are likely to want to trade, it pays to remember that ETFs cannot provide exposure to all the asset classes. For example, UK small cap and specialist income vehicles are better bought via individual shares or in investment trusts, which you can do at low cost on IG’s share dealing platform.
You may also want to consider owning a managed portfolio of ETFs for your long-term investments. IG Smart Portfolios offer robust and low-cost portfolios to suit most risk tolerances, and in addition there is no share dealing custody charge for clients with portfolios worth more than £15,000.