Top 5 ETFs on Morningstar

Which exchange-traded funds are Morningstar readers interested in this month? Topping the charts are developed market equity funds - with a bias towards income strategies

Emma Wall 17 June, 2015 | 4:00PM
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All this week we are running a Guide to Active and Passive Investing to help you, the investor, make smart choices for your portfolio.

1. Vanguard FTSE All-World UCITS ETF (VWRL)

This Fund seeks to provide long-term growth of capital by tracking the performance of the FTSE All-World Index, a market-capitalisation weighted index of common stocks of large and mid cap companies in developed and emerging countries.

2. Vanguard FTSE 100 UCITS ETF (VUKE)

The fund provides broad exposure to large cap UK equities and can be used as a core holding, says Morningstar passive fund analyst Hortense Bioy. Investing in this well-diversified fund could appeal to those looking to build a UK-centric portfolio. However, investors should carefully examine the index's composition.

With a 19-23% weighting, financials is the top sector represented in the index. Also, overall a quarter of the index is made up of resources companies like Royal Dutch Shell and Rio Tinto which are acutely exposed to the fortunes of the broader economy and their performance is often directly linked to international commodity prices.

3. iShares Core FTSE 100 UCITS ETF Distribution (ISF)

It is important to bear in mind that the FTSE 100 index consists predominantly of global players, with more than 70% of the revenues of FTSE 100 companies coming from outside the UK, while most of the top ten FTSE 100 companies report their results in US dollars rather than sterling, says Bioy. This fund can also serve as a tactical tool for those looking to place a bet on the near-to-medium-term prospects of the UK equity market under the belief that it is undervalued.

4. iShares UK Dividend UCITS ETF (IUKD)

This broadly diversified, large and mid-cap focused fund, which offers exposure to the 50 highest yielding UK stocks, could serve as a core UK equity holding for investors seeking a regular income stream. It could also be considered as a satellite holding, explains Morningstar analyst Hortense Bioy.

However, investors should be aware that sector-wise, the fund is heavily biased towards financials, which account for 35-40% of the portfolio weighting.

By style, the fund leans towards value. Weighting by dividend yield rather than market capitalisation results in a tilt towards smaller and deeper value companies. Historically, value stocks have offered better risk-adjusted returns than their growth counterparts but can remain out of favour for years.

Investors looking at this fund should also be wary of value traps. A value trap occurs when a company’s dividend yield is high only because its share price is low, reflecting the fact that the company may be in trouble. Also, while some companies may pay large dividends, the effects of capital depreciation can dominate the positive income stream.

5. Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)

This Fund seeks to track the performance of the FTSE All-World High Dividend Yield Index, a free float adjusted market capitalisation weighted index of common stocks of companies, excluding real estate trusts, in developed and emerging markets that pay dividends that are generally higher than average.

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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 Core FTSE 100 ETF GBP Dist731.10 GBX1.12Rating
iShares UK Dividend ETF GBP Dist761.80 GBX0.98Rating
Vanguard FTSE 100 UCITS ETF32.75 GBP1.08Rating
Vanguard FTSE AllWld HiDivYld ETF $Dis GBP48.02 GBP0.53Rating
Vanguard FTSE All-World UCITS ETF GBP81.99 GBP-0.17Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar