How to choose the right ETFs for your investment portfolio

There has been an explosion of index-tracking exchange-traded funds (ETFs) in recent years, covering every market, sector and region of the world.

Private investors are snapping them up for their low charges and amazing diversification, but with thousands to choose from, finding the right one can be bewildering.

Globally, the number of ETFs have grown to more than 7,600 in 2020, from just 276 in 2003, according to Statista.

Many don’t know where to start, or stick to the obvious ones, such as ETFs tracking the US S&P 500 or FTSE 100.

We asked three ETF experts to highlight a selection of their favourite funds that could do well as the post-Covid recovery gets under way.

Most private investors will invest in ETFs through online wealth platforms, either in their local jurisdiction or, if based offshore, through sites such as Interactive Brokers, Saxo Bank and Swissquote. Availability will vary according to the platform.

These funds are not for everybody. Some are specialist, or risky. Always remember to balance them against your existing holdings, and invest for the long term to overcome short-term volatility.

iShares Russell 2000 ETF

This ETF tracks the performance of the Russell 2000 Index of smaller US companies. Small caps can be more volatile but outperform when confidence is rising, Vijay Valecha, chief investment officer at Century Financial in Dubai, says. “The Russell 2000 is more diversified than the tech and growth-heavy S&P 500 and should benefit from the vaccine-driven cyclical recovery,” Mr Vijay adds.

Underlying charges: 0.19 per cent

Yield: 0.90 per cent

Year-to-date total return: 17.80 per cent

iShares Global Clean Energy ETF

As global governments target net-zero carbon, money is pouring into renewables such as wind and solar. In a further boost, US President Joe Biden’s $2.25 trillion infrastructure plan will focus on green energy and decarbonisation, Mr Valecha says. “This fund is one of the most liquid and well-established clean energy ETFs, and globally diversified with 40 per cent in the US and significant holdings in Canada, New Zealand, Hong Kong and Brazil,” he says.

Underlying charges: 0.46 per cent

Yield: 0.42 per cent

Year-to-date total return: -20.24 per cent

Shares MSCI Europe Financials ETF

Mr Valecha picks this ETF that tracks the MSCI Europe Financials Index, giving investors access to around 80 financial companies in Europe.

European banks now offer better value than their US counterparts and if inflation and interest rates rise, that would improve their margins and profitability, he says. “The EU’s €750 billion [$881bn] economic recovery plan should also help the banks ramp up their lending activity.”

Underlying charges: 0.48 per cent

Yield: 1.21 per cent

Year-to-date total return: 20.97 per cent

iShares MSCI Emerging Markets ETF

The iShares MSCI Emerging Markets ETF seeks to track large- and mid-capitalisation emerging market stocks, with highest exposure to China, Taiwan, and South Korea.

Many investors have overlooked emerging markets due to runaway US success, Mr Valecha says. “Emerging markets often outperform during periods of US underperformance, making this ETF a perfect complement to a well-diversified portfolio.”

Underlying charges: 0.68 per cent

Yield: 1.38 per cent

Year-to-date total return: 7.33 per cent

iShares PHLX Semiconductor ETF

This ETF invests in large- and medium-sized companies developing semiconductors, which lie at the heart of all modern electronics systems.

Unlike some other high-dividend ETFs, it applies strict rules to avoid potential income traps, companies with high dividends but a poor underlying business

Matt Brennan, head of the ETF team at AJ Bell

It gives investors exposure to semiconductor powerhouse Taiwan, but should also benefit from US plans to invest $50bn in building its chip industry. The current semiconductor shortage “makes this ETF one of the most bullet-proof investment trends in the market, as they are as necessary to our lives as bread and water”, Mr Valecha says.

Underlying charges: 0.46 per cent

Yield: 0.74 per cent

Year-to-date total return: 14.51 per cent

US Global Jets ETF

JETS is a pure play airline ETF, Mr Valecha says. This fund is 80 per cent invested in US domestic airlines and aviation companies, and 20 per cent internationally. “This reopening trade should benefit from easing of travel restrictions.”

Underlying charges: 0.60 per cent

Yield: 0.00 per cent

Year-to-date total return: 18.09 per cent

iShares S&P 500 Information Technology Sector ETF

This is a cost-effective way of gaining access to some of the largest US technology companies, Matt Brennan, head of the ETF team at fund platform AJ Bell, says. Top 10 holdings include Apple, Microsoft, Visa, MasterCard, PayPal, Adobe, Cisco and Salesforce.

Underlying charges: 0.15 per cent

Yield: 0.00 per cent

Year-to-date total return: 7.45 per cent

Fidelity Global Quality Income ETF

This ETF gives investors access to a portfolio of global companies paying above average dividends, Mr Brennan says. “Unlike some other high-dividend ETFs, it applies strict rules to avoid potential income traps, companies with high dividends but a poor underlying business.”

Underlying charges: 0.40 per cent

Yield: 2.41 per cent

Year-to-date total return: 12.57 per cent

UBS MSCI World Socially Responsible ETF

More investors are looking to invest in green funds that adopt environmental, social and governance (ESG) criteria. This ETF starts with a portfolio of developed market equities plucked from the MSCI World Index, then removes certain “sin” stocks, such as tobacco, alcohol, fossil fuels and weapons. “This allows investors to gain exposure to a portfolio of global equities, with a lower carbon footprint and less controversial industries,” Mr Brennan says

Underlying charges: 0.25 per cent

Yield: 1.09 per cent

Year-to-date total return: 9.57 per cent

Franklin FTSE China ETF

This fund invests in large- and mid-sized Chinese companies, Mr Brennan says. He also tips the Franklin FTSE India ETF. “These two ETFs give investors access to two of the fastest-growing economies in the world,” he adds.

Underlying charges: 0.19 per cent

Yield: 0.90 per cent

Year-to-date total return: 0.66 per cent

Invesco Elwood Global Blockchain ETF

Cryptocurrencies such as Bitcoin are volatile and controversial, and aren’t for everyone, says Tom Bailey, ETF specialist at wealth platform Interactive Investor. Investors who are happy to take a punt but do not want to buy the actual currencies could choose this ETF instead.

“It offers exposure to companies involved directly in Bitcoin and crypto mining, and more conventional companies using the underlying blockchain technology. This is not for the faint-hearted and should only ever form a tiny amount of a balanced portfolio.”

A slightly less risky option is the First Trust Indxx Innovative Transaction & Process UCITS ETF, which does not hold any cryptocurrencies but tracks an index of companies investing in blockchain technology.

Underlying charges: 0.00 per cent

Yield: 0.00 per cent

Year-to-date total return: 26.65 per cent

It offers exposure to companies involved directly in Bitcoin and crypto mining, and more conventional companies using the underlying blockchain technology

Tom Bailey, ETF specialist at Interactive Investor

VanEck Vector Video Gaming & eSports ETF

This is another esoteric ETF for those who want to benefit from the fast-growing and profitable PC gaming business, Mr Bailey says. “The VanEck ETF tracks the MVIS Global Video Gaming eSports Index, composed of 25 stocks. Or consider The Global X ETF, which tracks the Solactive Video Games & Esports V2 Index.”

Underlying charges: 0.55 per cent

Yield: 0.12 per cent

Year-to-date total return: 1.73 per cent

VanEck Vectors Morningstar Global Wide Moat ETF

Billionaire investor Warren Buffett, chairman of Berkshire Hathaway, popularised the term “moat” to describe a company with a strong competitive advantage that keeps out competitors.

But rather than trying to work out which companies have a moat, this ETF does the job for you, tracking global companies on the Morningstar Global Wide Moat Focus Index, Mr Bailey says.

Underlying charges: 0.47 per cent

Yield: 1.25 per cent

Year-to-date total return: 20.31 per cent

iShares Global Timber & Forestry ETF

The price of lumber is soaring due to supply shortages and bottlenecks, as demand for houses and renovations surges, Mr Bailey says. “This ETF tracks the S&P Global Timber & Forestry Index, which is comprised of the 25 largest publicly traded forests and timberland companies.”

Underlying charges: 0.46 per cent

Yield: 0.86 per cent

Year-to-date total return: 12.20 per cent

iShares MSCI USA SRI ETF

For investors who want exposure to ethical US companies, Mr Bailey recommends this ETF, which tracks only companies with high ESG ratings.

Underlying charges: 0.55 per cent

Yield: 0.00 per cent

Year-to-date total return: 0.20 per cent

Global Online Retail ETF

As the world shifts from bricks-and-mortar retail to online shopping, companies such as Amazon and Alibaba are reaping the benefits. This fund looks beyond those two behemoths and includes smaller operators such as DoorDash, Peloton Interactive, Etsy and Delivery Hero, which may grow faster, Mr Bailey says.

Underlying charges: 0.69 per cent

Yield: 0.00 per cent

Year-to-date total return: 3 per cent (since launch in March)