Whenever I get asked the question “which is the best ETF or exchange traded fund?”, I am always a little bemused because the obvious answer is “it depends on what you are looking for”. However, I have come to realize that what the investor means is “which is the best ETF in a particular asset category?” or “which is the best ETF that suits my style of investing?”
In looking at ETFs, I consider three factors:
- The index tracked. In other words, what is the ETF actually investing in? Is this the best index, or even the right index to invest in? Is it a benchmark index?
- The issuer of the ETF. This is relevant because the biggest and best issuers usually have the best market makers working for them, who provide the best liquidity at the finest spreads. This can be really important, particularly if you want to buy when there are few sellers (e.g. March 20, 2020) or sell when there are few buyers (e.g. late Feb/early March 2020). The big issuers will also have the best algorithms for tracking, which will reduce error and needless transaction expenses. I don’t have any concerns with iShares (part of Blackrock), Vanguard, BetaShares or ETF Securities – but this could be an issue as the Australian market grows. I avoid small or newly originated ETFs, because typically, the liquidity is poor; and
- Finally, the management fee. As this is a direct deduction from your return, and the ETF is on autopilot to track the index, the higher the fee, the lower the return.
Keeping to ASX traded, low cost passively managed index tracking ETFs (there are also some actively managed ETFs), here are my answers to the questions above. Firstly by asset category (e.g. Aussie shares, international shares, fixed interest etc), then by investor type(novice, sophisticate, balanced, risk taker etc).
Asset category
1. Australian shares
A choice of two. Either iShares Core S&P/ASX 200 (IOZ), or Vanguard’s Australian Shares Index Fund (VAS). Management fees are a tiny 0.09% pa for the former, 0.10% pa for Vanguard.
I prefer VAS from Vanguard because it tracks a broader index of 300 stocks, the S&P/ASX 300.
2. International shares
With the USA accounting for 55% of world equity market capitalization and being the lead market, I simplify “international shares” question to which is the best USA tracking ETF. This is not to say that you want to turn a blind eye to European and other developed markets, but they are almost second order questions.
In the USA, iShares IVV, which tracks the broadest lead index, the S&P 500, commands the top position. Management fees are just 0.04% pa. There is also a currency hedged version (which I would suggest at the moment since I think the Australian dollar is going higher), which trades under the code IHVV. The management fee is slightly more expensive at 0.10% pa.
3. Emerging markets
Emerging markets is a different proposition because the factors that drive growth in Asia (including China), South America and Eastern Europe can be different to those driving growth in the USA or Europe.
iShares MSCI Emerging Markets (IEM) gets the nod over Vanguard’s FTSE Emerging Markets (VGE) due to the underlying index. In both, stocks from China are the major weighting – about 40%.
4. Australian fixed interest and bonds
For broad exposure, iShares Core Composite Bond (IAF) very narrowly beats Vanguard’s Australian Fixed Interest Fund (VAF). Both track the same index, but IAF has a lower management fee.
5. International fixed interest
For credit and interest rate exposure, iShares Core Global Corporate Bond (IHCB). It is currency hedged, because you invest offshore to access diversified credit risk (which isn’t available in Australia). So, there is no need to take on additional currency risk.
6. Property
Not easily accessible through an ETF. Both IOZ and VAS will give market weighted exposure to listed Australian property trusts (about 7%). Vanguard also has the Vanguard Australian Property Securities Index ETF (VAP), which invests in listed Australian real estate trusts.
7. Gold
GOLD from ETF Securities. It invests in physical gold and is unhedged. QAU from BetaShares is currency hedged.
8. Technology
If you want in invest in technology per se, I think you go global rather than local. On the big cap side, the purest ETF to invest in is FANG+ from ETF Securities – 10 leading technology companies (equally weighted) including Apple, Alphabet (Google), Facebook, Tesla, Baidu and Alibaba. The ASX code is FANG.
At the next level down, Global Robotics and Artificial Intelligence (RBTZ) and Global Cybersecurity (HACK), both from BetaShares, are interesting. BetaShares also provides regional exposure through the Asia Technology Tigers ETF (ASIA).
Investor Style
1. Novice
For a novice/first time investor, I would stick with broad based exposure to the Australian share market. When they hear on the TV news that the All Ords has gone up by 1%, they will know that the value of their investment has also gone up by 1%. VAS from Vanguard.
2. Sophisticated
The Geared Australian Equity Fund (GEAR), from BetaShares. Not cheap with an effective management fee of 0.80% pa, but an extremely easy way to get leveraged exposure to the Australian share market. No margin calls.
3. Balanced
Hard not go past Vanguard’s “self-titled” Vanguard Diversified Balanced Index ETF. Trading under the ASX code VDBA, this ETF invests in multiple Vanguard wholesale index funds in proportion to an allocation for “balanced” investors. Approximately 50% is invested in growth assets (Australian shares, international shares) and 50% in income assets. The overall management fee is 0.27% pa.
4. Bull or bear
For the bull, GEAR or GGUS, the BetaShares Geared US Equity Fund. The latter tracks the US S&P 500, is leveraged at about 2.2 times, is free of margin calls, and is currency hedged.
For the bear, also from BetaShares, the Australian Equities Bear Fund. A simple way to profit, or protect against, a falling Australian share market. However, if the market rises, your investment in BEAR will go backwards.
5. Ethical
BetaShares Global Sustainability Leaders ETF (ETHI) tracks the NASDAQ Future Global Sustainability Index. ETHI holds a diversified portfolio of large, sustainable, ethical companies from across the globe. There is also a currency hedged version under the code HETH.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.