3 Low-Cost Funds to Profit from UK Strength

The UK economy should be one of the fastest growing in the developed world over the next few years; we present some low-cost ideas for tapping into this potential

Holly Cook 5 December, 2014 | 9:09AM
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Holly Cook: Hello and welcome to Morningstar. Today we’re going to be looking at some low-cost investment ideas for getting exposure to the U.K. companies. Joining me to do that is Jose Garcia Zarate; he is a senior fund analyst here at Morningstar.

Jose, thanks for joining me.

Jose Garcia Zarate: Hello.

Cook: So this week the OBR announced its new U.K. economic forecast, and we continue to do pretty strongly. What’s your opinion?

Zarate: It’s difficult not to be positive in a way because the U.K. economy has done much better than expected, particularly over the last couple of years. The projections are for GDP growth to slow down a little bit going forward, but the U.K. should be one of the best-performing developed economies in the next two to three years really.

Cook: So that’s good news obviously for those people who want to try and tap in to that opportunity. So if you do want to invest in U.K. companies, FTSE 100 obviously is an index that pretty much everyone will have heard of. Do you have a low-cost fund idea for people who want to try and tap into those UK companies?

Zarate: There are quite a few ETFs that offer you exposure to the FTSE 100, which as you mentioned, is the most popular, most recognizable UK Equity Index. I’ve chosen the Vanguard FTSE 100. The reason why I have chosen it is because it is the cheapest one out there. It charges 9 basis points. And the only thing I would say is that investors need to be aware that the FTSE 100 is not really a representation of the U.K. domestic economy. These companies are very large-cap corporations, and they derive a lot of their revenue from international markets. So it’s kind of like more of a global index rather than the U.K. economy index.

Cook: Okay. So if you do want to home in on the U.K. economy, what are low-cost idea for that sort of domestic growth?

Zarate: If you want to have a better representation of UK plc, so to speak, then you need to expand the range of companies that you want in your portfolio and basically that means going for the mid-cap and the small-cap. There are indices out there that offer you that exposure. The FTSE All-Share is perhaps the most obvious choice, and there are ETFs that track that FTSE All-Share. For example, the SPDR FTSE All Share is physically replicated as was the Vanguard that I mentioned before and it charges 20 basis points as well. So, pretty low cost exposure to the broad spectrum of market sizes of U.K. companies.

Cook: Okay. And then, what if you have a specific strategy in mind? For example, I thought of you as who would be wanting to generate income from that portfolio. What’s the fund that could help you do that?

Zarate: Well, again there are ETFs that tap into the particular investment goal. Actually these ETFs are in the realm of what we call at Morningstar strategic beta. So, they’re not plain vanilla ETFs and perhaps that basically means that probably you’re going to have to pay a little bit more. They’re still pretty cheap in comparison to actively managed funds.

I have chosen the iShares UK Dividend, which offers exposure to the 50 highest-yielding – paying companies in the U.K. It charges 40 basis points and it doesn’t discriminate in terms of size. So you may have a mixture of large-cap and mid-cap companies there, and it gets rebalanced on a frequent basis.

Cook: Thanks as there goes some three low-cost ideas there for tapping into the U.K. economy prospects. Thank you.

Zarate: Thank you.

Cook: For Morningstar, I’m Holly Cook. Thanks for watching.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
iShares UK Dividend ETF GBP Dist787.90 GBX1.34Rating
SPDR® FTSE UK All Share ETF Acc57.98 GBP1.54Rating
Vanguard FTSE 100 UCITS ETF32.73 GBP1.57Rating

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites