Where to start with ETF investing? You could look at UK only ETFs as you might feel that you know a lot about UK companies. This is called “home country bias” and it can be a reason some investors underperform the wider market. In recent years the UK has lagged the performance of world, and in particular US stock markets. The primary reason for this is an absence of large technology companies such as Microsoft and Apple. If a lot of growth is in the US, what about starting with US funds? If you invest in a single country you have 100% exposure to that country’s regulatory and political framework. There could be country specific events, such as an election, that lead to underperformance of the fund. That leaves us with worldwide ETFs which typically have exposures of 62% US, 10% Eurozone, 8% Japan, 6% UK, 5% Other Europe inc Switzerland and 9% rest of world. It becomes the best of the best of the world economy and such diversification will help to lower risk. Also we need to start out with ETFs that we would hold for a long period of time. When it comes to ETFs, size matters. I like the quote "capital flows to where it is treated best." The largest ETFs have attracted the most money for a reason; low fees, low risk and good performance. As most ETFs are rated by the website Morningstar, performance is more transparent than that of some investments. In this article we look at the 10 largest global ETFs measured by the fund size as traded on the UK stock market. The star rating comes from Morningstar and it assesses performance on both an absolute and risk / volatility adjusted basis. This includes how closely the ETF tracks the underlying index it is trying to replicate or the tracking error. The Lyxor fund has had the best performance but that is probably due to the Euro exposure rather than its underlying performance. The Xtrackers funds have the highest risk rating of the funds compared and they should be dropped from consideration.
The HSBC fund has the lowest fees and a good growth record it is the top pick amongst the funds listed. The high 3 year return shows how the growth of ETFs and index tracking has led to the largest companies in the world having large inflows of funds from investors which has driven up their share prices. It also highlights that investing outside of the “core” (the iShares ETF) and having more emerging markets exposure has assisted performance. The UBS socially responsible fund may interest those looking to deviate from a fund purely weighted around market capitalisation. The ishares minimum volatility fund has, not surprisingly, the lowest risk profile and it may provide useful diversification for some investors, particularly if the economic cycle becomes mature and lower risk companies such as utilities begin to out-perform. The ishares fund quality factor fund looks at companies demonstrating the following characteristics:- high percentage of company earnings allocated to shareholders; low levels of debt; and low variability of year on year company earnings. The performance is below that of a generic worldwide ETF. This may be due to the fund rebalancing only on a semi-annual basis which means that it can hold under-performing companies for a longer time period than funds which rebalance more frequently. It is one to watch for the time being. The Vanguard fund has more expensive fees than HSBC and it has lower growth. Although Vanguard is popular in many quarters its All-World ETF cannot be recommended at this point in time.
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AuthorI am a private investor who finds ETFs a low cost way to participate in the stock market. ArchivesCategories |