ETFs to join Investment Association sectors next week

Laith Khalaf
15 April 2021

•    ETFs take another step into the mainstream
•    Over 500 ETFs are expected to join the Investment Association sectors on Monday
•    Most popular ETFs with DIY investors
•    ETF suggestions for investors

Laith Khalaf, financial analyst at AJ Bell, comments:

“The inclusion of ETFs in the Investment Association sectors may sound like an arcane technical development, but it marks another step into the mainstream for ETF investing in the UK. It will bump up the visibility and comparability of ETFs, and provide a further competitive challenge to active funds and index trackers.

“Plain vanilla ETFs are very similar to tracker funds, in that they follow the performance of a broad market index, and do so at extremely low cost. They can also be held in ISAs and SIPPs just like traditional funds, and so have their gains and income sheltered from tax. Probably the most attractive edge that ETFs offer is they can be traded throughout the day, giving investors greater scope to buy on dips. By contrast, tracker funds work on a forward pricing basis, so you never know exactly what price you will pay. Over the long term this isn’t likely to make a big difference, but some investors like to invest part of their portfolio more tactically, and some simply want to know they can buy and sell immediately, as they can with listed shares.

“ETFs can also be useful to give investors more specialised exposure to particular themes in the market, which active and index funds don’t tend to cover in such a focused way. For instance, the iShares Automation and Robotics ETF tracks an index of companies involved in the robotics and automation industry. The iShares Global Clean Energy ETF is another fund we’ve seen a lot of interest in recently, as demand for environmentally friendly funds has picked up. This was particularly the case in the aftermath of the US election, thanks to Joe Biden’s green spending plans.

“This is where ETF investing starts to become more active than passive, because these thematic funds do carry higher charges than plain vanilla ETFs that simply track a broad market index. Investors also need to pay attention to the construction of the underlying index to make sure it fits their expectations. Every investor knows what the FTSE 100 is, but once you start moving away from the big market indices, you need to have a closer look under the bonnet of the ETF you’re considering.

“At AJ Bell, we currently have 17 ETFs on our Favourite Funds list, covering a wide range of markets, which investors can use as the basic building blocks of a portfolio. We also use ETFs in our own risk-rated fund range, which allows investors to buy a fully managed portfolio suited to their own goals, at very low cost. 

“While there are definitely some weird and wacky options in the ETF space, the most popular options with DIY investors show they are predominantly using ETFs to gain exposure to major markets, just as they would an index tracker fund. As ETFs rise in profile, more investors will likely join the growing throng of converts, and their inclusion in the Investment Association sectors will only serve to accelerate that trend.”

Most popular ETFs with DIY investors

The most popular ETFs with DIY investors on the AJ Bell Youinvest platform show a marked preference for simple, plain vanilla, index tracking ETFs, both in the last twelve months, and the previous year. There are two notable exceptions. One is the iShares Global Clean Energy ETF which has proved extremely popular in the last year, particularly after the election of Joe Biden as US President, on the back of his green energy infrastructure plans. 

The other is the iShares Physical Gold ETC, which gives investors low cost exposure to the sanctuary of gold, and importantly, is physically backed with holdings of the precious metal. Physically backed gold ETCs have been a welcome addition to the UK investment landscape, because they give investors a convenient way to get access to the safe haven metal in their SIPPs and ISAs, which can act as some ballast in distressed markets.  

April 2019 - April 2020

April 2020 - April 2021

 

 

iShares Core FTSE 100

iShares Core FTSE 100

Vanguard FTSE 250

iShares Global Clean Energy

Vanguard S&P 500

Vanguard S&P 500

Vanguard FTSE 100

Vanguard FTSE 250

Vanguard FTSE All-World

Vanguard FTSE 100

iShares S&P 500

Vanguard FTSE All-World

iShares Core MSCI World

iShares S&P 500

iShares UK Dividend

iShares Physical Gold

Vanguard FTSE Dev Europe Ex UK

iShares Core Emerging Markets IMI

iShares UK Equity

iShares Core MSCI World

Source: AJ Bell Youinvest between 01/04/2019-01/04/2020 and 01/04/2020-01/04/2021

ETF suggestions for investors

Lyxor Core MSCI World ETF
This ETF gives investors exposure to the performance of stock market in 23 developed economies at an annual charge of just 0.12%, so it can act as a simple, one stop investment for those simply looking for broad market exposure. It’s well diversified, though it does carry high exposure to the US market, which makes up around two thirds of the fund, but that’s simply a reflection of global stock market value right now. 

Vanguard FTSE 250 ETF 
With an annual charge of just 0.1%, this ETF offers investors a cheap and cheerful way to gain exposure to the UK’s medium-sized companies, which have been the best performing area of the UK stock market over the last twenty years.

iShares Core MSCI EM IMI ETF
This ETF is available at an annual charge of 0.18%, and invests in shares across 24 emerging markets, including some small cap stocks to provide broader and more diversified exposure. The lion’s share of the fund is invested in China and the Far East, reflecting the size of markets in that region, though it also has exposure to Latin America, Emerging Europe and Africa.

Laith Khalaf
Financial Analyst

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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