ETFs for 2019

If you’re still thinking about what your investment strategy might be for this year, here are some ETF ideas for you to consider.

We’ve asked four ETF experts to highlight one or two ETFs and there’s one from me as well. They cover the UK, US small caps, emerging markets and global value.

I should stress that we’re not suggesting a portfolio here. The suggestions aren’t balanced as they don’t include European stocks, US large caps, Japan and fixed income too. We’re just highlighting a few ideas for you to consider as part of a wider investment strategy.

With those caveats out of the way, here goes:

Oliver Smith, Portfolio Manager, IG

For 2019 I’m opting for home bias by highlighting the Vanguard FTSE 250 UCITS ETF (VMID).

The FTSE 250 has historically outperformed the FTSE 100, but has stalled since the Brexit result in 2016 and now trades at a price to book discount. A conclusion of sorts to the Brexit saga should see the 250’s domestic focus in industrials and house builders perform well, while avoiding the worst of the 100’s overseas foreign exchange exposure.

ETF providers have been in a price war with their FTSE 100 offerings, but the 250 has not had nearly as much competition – possibly as larger institutional investors feel the underlying is too illiquid and much of it is not in the MSCI World Index, therefore making it ‘off index’. Charging just 0.1%, and with a bid-ask spread of 0.15%, VMID is cheaper than its ETF peers and has offered a superior total return over time; this makes it a strong contender to be the mid cap instrument of choice for investors.

 

Scott Longley, ETFstream

To be a contrarian investor is one of the great epithets in the world of investment. Who wants to follow the herd when they can be a maverick, rules-ignoring, original thinker who eschews what everyone else is doing and forges their own path through the markets miasma?

Well, if you have any aspirations in this direction or you yearn to buy while the Brexit blood is on the streets, then a UK ETF is the thing for you.

Now, everyone knows that the world’s investors have been giving UK assets the barge-pole treatment as the Brexit process has collapsed into the kind of on-the-boil farce not glimpsed since ‘When did you last see your trousers?’ was on the London stage.

But whatever your views on the UK’s ultimate destination, it can also be said that as far as UK equities are concerned – and to borrow an apposite phrase – now is their darkest hour. Whether its May’s deal, a no deal or even a second referendum, the likelihood is that UK assets will hit rock bottom within the next few months. Even the very worst outcome would leave many top UK companies looking very cheap in a global context.

Even better, due to the price war currently taking place in the world of ETFs – and with the UK still ‘core’ to most providers – it means that access to an appropriately low-cost way to access these bargain basement UK equities exists.

For those looking to access the FTSE 100, then the iShares Core FTSE 100 comes at a price of seven basis points or bips (0.07%). If you want FTSE All-Share then State Street offers the SPDR All Share FTSE UCITS at 20 basis points.

But for all-round value, and if you are willing to go with a fund that tracks Morningstar’s UK index, then the Lyxor Core Morningstar UK UCITS ETF (LCUK) fund comes in at a minimal four bips.

At such prices, even if the UK doesn’t just circle the pan in the months to come but goes completely down the tubes, then at least you have a cheap entry point for whichever UK equities manage to survive the flush.

 

James McManus, Head of ETF Research, Nutmeg

We’ve recently increased our allocation to US small caps as a theme for the first half of 2019. We believe US small caps are well positioned to perform relative to large caps, due to the continued strength of the domestic US economy, and their relative starting points given the extent of small cap underperformance in the fourth quarter of 2018.

The iShares S&P Smallcap 600 UCITS ETF (IDP6) remains our preferred route to market in US small cap, delivering strong, consistent tracking performance, with a relatively deep secondary market that minimises transaction costs. Although the expense ratio is higher than where we would like it to be (small caps are still too expensive relative to large cap exposure), this is slightly offset by securities lending revenues and a historically positive tracking performance versus index through virtue of the fund’s Irish domicile and the tax advantage this provides.

 

Peter Sleep, Investment Manager, Seven Investment Management

The trade weighted USD is near a 15-month high and could fall, which may help the emerging markets. I know that the trade-weighted USD is biased towards Canada and is not a good indicator of EM trade, but, hey, have you ever been to Montreal?

EM is not particularly cheap, but maybe with the US rates and economy stabilizing and Chinese stimulus, it could be higher in a year than today. I like the large cap value bias of the RAFI products and hold an EM RAFI fund from Henderson Rowe and suggest the related ETF, the Invesco FTSE RAFI Emerging Market Equity UCITS ETF (PSRM LN).

 

Ed Bowsher, ETFstream

Value investing has had a rotten decade but I suspect it’s going to do better looking forward. That’s mainly because value stocks are cheap relative to their historic valuations. I also think that value investing is a nice way to tilt your portfolio away from pure ‘plain vanilla’ index investing where you’re just putting your money in well-known indices such as the Footsie and S&P.

The ishares Edge World Value MSCI World Value Factor UCITS ETF (IWVL) gives you exposure to around 400 value stocks across 23 countries. The stocks are chosen using the following criteria: price/earnings ratios, price/book, and operating cashflow. Just over a third of the portfolio is US stocks. Japan is also well-represented, making up 28% of the ETF. The weightings of the stocks is based on markets caps – so a larger stock makes up more of the fund than a smaller one – although there is a sector cap as well.

Value investing using smart beta funds has its drawbacks, but given where we are in markets right now, I’m happy to have some value exposure in my portfolio nonetheless.

For more ETF ideas, check out Five top UK ETFs and Five top Japan ETFs.

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