ETFS for 2018

by , 13th January 2018

If you’re wondering what to do with any spare cash you may have, here are six ETF suggestions for 2018. They include a mainstream US and Japanese ETFs along with some more niche funds. Some of the suggestions come from  ETFstream writers.

  1. Johann Bornman, Product and Sales Director at ETFmatic.

It was a year of strong returns for risky asset classes. Equity markets reached all-time highs, with emerging markets returning double digits.

As impressive over this period, however, was the S&P 500’s returns. As a global investor, our client portfolios are invested in both developed and emerging market equities.

However, North America, and more specifically the US within that region, still make up the largest percentage in world equity market capitalisations. A global investor, therefore, usually, has a large exposure to the US. In a year where Bitcoin was on the front pages, one of the oldest and the largest equity markets provided investors double-digit returns and despite the strong EUR and GBP, global investors still received above-average returns (7.20% and 11.16%). The ETF we would pick would therefore be Vanguard’s S&P 500 UCITS ETF. (VUSA, VUSD). For seven Basis points and full replication, investors received transparent broad-based exposure to the largest, most stable companies in the world along with double-digit returns.

2. David Stevenson, ETFstream

All the cynics out there would love 2018 to be the year where the Tech industry meets its nemesis – be that in the shape of prim pan European regulators, a vengeful President Trump determined to whack Amazon, or a vicious stockmarket sell off. Yet personally I wouldn’t be so sure that this year will be THAT year – I don’t doubt a nasty sell off is coming, its just that I think it’s still a few years away yet. The continued good news is that there are some very big, very important global shifts going on all around us and I see no reason why these secular drivers will suddenly fall over in 2018.

Take the transformation to the new electric grid, powered by more renewables and using ever more batteries. This is a vast paradigmatic transformation with massive consequences – it almost led me to suggest an American ETF from Global X called the Lithium & Battery Tech ETF (LIT) which invests “in the full lithium cycle, from mining and refining the metal, through battery production”.

But I’ve held back from what will obviously be an insanely volatile idea and opted instead for two slightly less insanely volatile ideas – both based on big, important global tech trends. The first ETF is from iShares here in the UK and has the ticker DGTL – guess what the theme is? You guessed right, Digitalisation. Or more precisely the ETF tracks an index which reflects the “performance of a subset of equity securities within the STOXX Global Total Market Index which derive significant revenues from the digitalisation industry. Companies included in the Index must generate at least 50% of their annual revenues from one or multiple predefined sectors relevant to the digitalisation theme, which fall under categories such as cybersecurity, cloud computing and financial technology”. The TER for this relatively new and small ETF is a very reasonable 0.40% and the biggest holdings include Wirecard, Grubhub, Yelp, Worldpay, VMWare, and Netapp.

As you’d expect US equities dominate the list with 47% of the value of the index. And the theme – digitisation. This sounds a bit anaemic and dull but if you talk to corporate folk they’ll tell you that the most profound changes at the moment are based around turning old style information into new, easily shareable digital content. It’s powering massive transformations and helping boost profits, even at legacy firms.

But this digitisation comes with a downside – once your key IP and business assets are in effect digitised, they are also online. And thus, vulnerable to hackers and cyber criminals.

Which is where my second ETf comes in. It’s also a UK listed ETF with the ticker ISPY and is from ETF Securities. The ETFS ISE Cyber Security GO UCITS ETF (ISPY) “is designed to provide exposure to companies engaged primarily in cyber security business activities by tracking the performance of the ISE Cyber Security® UCITS Index.”

And what’s inside the index behind this ‘secure’ ETF?

The ISE Cyber Security UCITS Index comprises “companies actively involved in providing cyber security technology and services. In order to be eligible for inclusion in the index, companies must be of a certain minimum size, their shares must be subject to minimum stock exchange trading volumes and they must be traded on recognised global stock exchanges. The companies comprised in the index are either those which work to develop hardware and/or software that safeguards access to files, websites and networks, both locally and from external origins (“Infrastructure Provider”) or those that utilise these tools to provide consulting and/or cyber security services to their clients (“Service Provider”). The two groups are market cap weighted whereas the constituents within each group are equal weighted.”

Key individual stocks within this ETF include the wonderfully named Splunk, as well as Radware, Trend Micro and Akami. US assets are even more pronounced in this ETF, comprising 72% of the value of the fund and the TER is 0.75%. Last year the ETF was up 14% and over two years the index has risen 35%.

Now, quite obviously, these will be two very risky ETFs. They’re invested in relatively expensive US growth stocks, from a tech sector that has been on fire for years. By and large these are also mid to small caps, which guarantees lashings of volatility. But both speak to a big shift in the digitalisation of modern corporations which is I think pressing and transformative. This trend isn’t going away any time soon and I see an ever-increasing amount of money being spent on novel ideas and products within this space. One just hopes that these indices have caught the right set of businesses to ride the trend!

3. Allan Lane, Managing Partner Twenty20 Investments

t feels like there’s no limit to what investment idea will next appear as an ETF.  With this outlook comes innovation complacency, where an idea is not newsworthy unless it is radically different.  As best told by Steve Johnson in his book “Where Good Idea Come From”, innovation doesn’t work that way.  Forget about light bulbs, instead look for better, cheaper, faster.

Franklin Templeton recently listed their Franklin LibertyQ Global Equity SRI UCITS ETF, combining Socially Responsible Investing with factor investing.  If factor investing is a good idea, then why not apply these techniques to an SRI portfolio?  Now that is innovation.

4. Ed Bowsher, ETFstream

I think most investors should have at least some exposure to Japan. Earnings growth could be as high as 8% this year and the economy looks to be in good shape. Corporate governance is improving and more businesses are focusing on return on equity for the first time – often due to a desire to join the relatively new Nikkei JPX-400 index.

My favourite Japanese ETF is the iShares Core MSCI Japan IMI UCITS ETF (SJPA). It tracks the MSCI Japan IMI index which comprises 1200 companies including large, mid, and small caps. This represents about 99% of the free float adjusted Japanese stock market by value. The annual charge is on the low side at 0.2%.  The biggest stock in the index is Toyota, and the largest sectors are consumer cyclicals, industrials and financials.

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