By continuing to use this site you consent to the use of cookies on your device. Find out more about our cookie policy and the types of cookies we use by clicking here

Investors Eye Low-Cost Funds for Income

Passive investors are looking to profit from weak sterling and dividend stocks, data from Morningstar.co.uk reveals

Karen Kwok 20 September, 2016 | 2:44PM

Passive-fund investors are looking to take profits from weak sterling following the Brexit vote, data from Morningstar.co.uk reveals. Passive funds that track the UK’s largest companies’ index – and whose international revenues have received a boost as the pound has fallen – were the most popular among readers in August, as well as those that invest in US equities.

Vanguard FTSE 100 ETF (VUKE) and Vanguard FTSE All-World (VWRL) were the most clicked on exchange-traded funds on Morningstar.co.uk last month, followed by Vanguard S&P 500 ETF (VUSA). iShares UK Dividend ETF (IUKD). iShares Core FTSE 100 ETF (ISF) and ETFs Short GBP Long USD (SGB3) were also in the top 10 list.

Benefiting from Weak Sterling

Uncertainty arising from the UK’s vote to leave the European Union did not hold back passive investors’ appetite for investment opportunities. As well as developed market equity funds, ETFs Short GBP Long USD (SGB3) also proved popular – a bond fund which benefits from weak sterling and a strong US dollar.

The most popular ETF, Vanguard FTSE 100 ETF is a strong choice that provides exposure to the 100 largest UK stocks at a very competitive price of 0.09%, Hortense Bioy, director of passive funds research at Morningstar said. iShares Core FTSE 100 ETF also provides the same exposure at a very competitive price, and it can be used as a core holding for investors looking to build a UK-centric portfolio and wishing to complement an allocation to mid-caps and small caps, Bioy said. 

Following the fall of the index on the day of the Brexit vote, the FTSE 100 has rebounded 14% to 6,833, surpassing the level at the beginning of the year.  

Dividend ETFs are in a Low Rate World

For investors hungry for income in an environment of rock-bottom interest rates, dividend-themed exchange-traded funds have been a popular choice over the past several years.

While UK dividend yields have been up to six times higher than bond yields, so it comes no surprise that iShares UK Dividend ETF (IUKD) ranking forth on the most popular ETF list among Morningstar.co.uk readers in August.

“Dividend-paying stocks tend to outperform in stable or declining-rate environments but struggle when rates are on an upswing,” Bioy said. However, she reminded investors that this ETF lacks sustainable dividend requirements.

“Despite the ETF offers exposure to the 50 highest-yielding UK stocks however companies that pay large dividends, these companies may do so at the expense of their growth or overall financial health,” she warned.

Bioy added that the ETF has consistently lagged its benchmark by an amount greater than its fees, which is an indication of poor tracking quality. The fund has an ongoing charge of 0.4%, which is at the high end of the range of ETFs providing exposure to UK dividend stocks.

Going Global for Income

Vanguard FTSE All-World High Dividend ETF (VHYL) comes fifth on the most popular ETFs list in August. This fund offers exposure to the largest high-yielding stocks from developed and emerging markets at the cheapest cost in its category. It has a total expense ratio of 0.29%. However, investors must be mindful of the limitations of this ETF as it does not address the issues of dividend sustainability and growth, Dimitar Boyadzhiev, Morningstar passive fund analyst said.

Another ETF that tracks the performance of high dividend-yielding stocks in the UK market, S&P UK Dividend Aristocrats ETF (UKDV) is also on the top 10 list and it has an ongoing charge of 0.3%.

Bonds Benefit from Monetary Stimulus  

The Bank of England announced its intention to renew quantitative easing last month, including plans to buy up to £10 billion of corporate bonds in a bit to boost the economy. Savvy investors are looking into ways to profit from that backdrop as iShares Core £ Corporate Bond ETF (SLXX) proved popular among Morningstar.co.uk readers in August.

Mark Benstead, senior portfolio manager of active fixed income at LGIM expects to see investors moving down the risk spectrum into investment grade bonds in order to pick up extra yield. However, he warns that it is crucial for investors to be adequately compensated for the additional credit risk, particularly in less liquid asset classes.

Gold Dropped as Confidence Picks Up

Gold, as a traditional store of value in times of economic uncertainty, has been in the top 10 ETFs list on Morningstar.co.uk since February this year. ETFs Phyical Gold (PHGP) and iShares Physical Gold ETC (SGLN) were among the popular choices.

However, ETFs tracking the yellow metal dropped out of the list in August as recent UK economic data has been surprisingly positive.

Investors should keep in mind the long term economic consequences of a Brexit vote, David A. Meier, economist at Julius Baer said.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
ETFS 3x Short GBP Long USD61.00 USD-0.17-
ETFS Physical Gold GBP9,574.45 GBX0.69-
iShares Core £ Corporate Bond148.08 GBP0.28
iShares Core FTSE 100 Dist741.40 GBX0.09
iShares Physical Gold ETC GBP1,961.57 GBX0.67-
iShares UK Dividend916.75 GBX-0.11
SPDR® S&P UK Dividend Aristocrats ETF12.92 GBP-0.19
Vanguard FTSE 100 ETF33.07 GBP-0.50
Vanguard FTSE All-World ETF GBP61.20 GBP-0.47
Vanguard FTSE All-World High Div Yld ETF GBP42.69 GBP-0.72
Vanguard S&P 500 ETF GBP36.25 GBP-0.83
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk