With over 6,000 ETFs, of which there are 1,200 ISA eligible ETFs, it can be intimidating for private investors to know where to start. Oliver Smith, Portfolio Manager at IG, shares some tips on how private should build portfolios using ETFs.
Oliver Smith, Portfolio Manager at IG.
How many ETFs should private investor have in their portfolio?
With smaller portfolios, such as those under £5,000, dealing costs are a crucial component of long term returns. Finding a low-cost share dealing platform, and trading infrequently should be the immediate goal. So IG’s current free ETF offer that runs to the end of April is worth looking at. People in this situation should look to invest in total return ETFs, where the dividends are re-invested on their behalf and so are a good way to reduce costs. Two to three ETFs across equities and fixed income will give most investors sufficient diversification.
For portfolios greater than this size there is no need to go over the top with investments in many ETFs. The great thing about ETFs is that just a small number can provide cheap and diversified exposure to many markets and thousands of companies. Around a dozen holdings will enable an investor to have their long-term core holdings and some smaller positions in tactical ideas. I am a believer in global reflation and think that overweight positions in Asian and European equities are warranted at this stage in the cycle. Shorter dated bonds and some gold-based ETFs will also help spread risk in the near term.
What are the options for investors who want to buy a house within five years?
Near-term savers should have the bulk of their savings in cash, but anyone with a three- to five-year view could consider taking on a little bit of risk to achieve a higher return. iShares GBP Corporate Bond 0-5yr UCITS ETF (IS15) offers roughly a 1% yield pick-up over UK Gilts, with very good credit quality in the underlying ETF.
What about private investors who want to save for long-term growth, perhaps for retirement?
Long-term savers should keep three to six months of cash to cover for short-term emergencies, and look to hold the bulk of their portfolio in global equities. It is true that stock markets are not cheap (no asset classes are), but they still represent the best way to participate in global growth in the years ahead. Any stock market corrections along the way should be welcomed, as long–term savers will benefit from pound cost averaging where they can accumulate more equities at a discount.
Two to consider are Vanguard FTSE All-World UCITS (VWRL), which has exposure to both developed and emerging markets, and iShares Edge MSCI World Size Factor (IWFS) which has equally-weighted exposure to mid-cap stocks and less exposure to the US than a standard market cap index.
What about private investors who don’t want to build their own ETF portfolio?
Private investors can open an IG Smart Portfolio. This is a great opportunity to invest in a globally diversified portfolio built using asset allocation models from BlackRock – the world’s leading asset manager. All they have to do is answer a series of questions to determine their risk profile, and can start from as little as £500. IG Smart Portfolios are an excellent way to save regularly, as there are no dealing costs and our fractional share technology ensures that they can be fully invested with no cash drag.
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)