Best ETFs for UK and European Investors

These ETFs have either been reviewed directly or indirectly (e.g. by looking at different benchmarks) on Bankeronwheels.com. I would consider investing in them, should I wish to gain exposure to a specific asset class. 

HANDPICKED ETFS FOR EUROPEANS

The Paradox of Choice

For someone that is not familiar with ETF benchmarks and criteria, selecting an ETF has become somewhat of a headache.

 

Websites generally list hundreds of ‘curated’ ETFs without any specific methodology on how they are selected.


I often get emails from readers asking about selecting an ETF because the TER is e.g. 10 basis points (aka 0.1%) lower.


You can try over-optimizing for a few basis points of performance, but it’s wiser to look at the bigger picture.


Also, what tells you that past Tracking Difference will be matched in the future? That TER won’t change? In fact, these move around frequently in a very competitive landscape.


For Equities, online ETF databases list thousands of ETFs without e.g. explaining their benchmarks. This makes the choice even more confusing.

 

I would suggest taking into account all main criteria that matter in the long run, not only TER in isolation, to sleep tight.

With respect to Bond ETFs the quality of available information is very low.

In fact, almost all websites look at them in the same way as they do for Equity ETFs. 


A reader recently asked me, “Raph, if the duration is so important for Bond ETFs why are industry-leading ETF comparison websites not showing it?”.

And that’s just the tip of the iceberg. Frankly, most of the investors are lost in the choice.

And I don’t blame them, I would be too.

 

Investing should be simple. While I usually have a preference for some ETFs, I have pre-selected some competitors as you may have individual preferences e.g. related to domicile or dividend distribution type.


Let’s dive into the Best ETFs for European and UK Investors.

This page is summarizing other reviews seen on Bankeronwheels.com.

It is updated on a periodic basis.

Taking your perspective

Long Term Investor Selection Criteria

EQUITY ETF SELECTION

Selection Criteria

If the above is confusing, I have a dedicated post summarizing the most important selection criteria.

 

How do I rank Equity ETFs?

 

As you know, looking at TER is not the best way of judging an Equity ETF’s performance (looking at their returns in Fund’s currency isn’t optimal, either – unless you adjust for investor currency)

 

That’s why the approach below takes a fair Tracking Difference ranking perspective. 

Key takeaways

Best World ETF

If you have more time, a dedicated analysis related Global a.k.a World ETFs is available, where these ETFs were reviewed in more detail. But to keep it concise:

 

For a World ETF, given the long term investing horizon, I would choose either Vanguard FTSE ALL-World UCITS ETF or BlackRock’s iShares MSCI ACWI UCITS ETF

 

Since, BlackRock has recently lowered it’s on-going charge, both should be expected to perform similarly in the long run. Vanguard has a marginal diversification benefit. Vanguard also gives you the option of a distributing fund.

 

Xtrackers MSCI AC World UCITS ETF and SPDR MSCI ACWI UCITS ETF are also good choices but historical tracking difference favours their larger competitors.

 

If you want to expand the diversification further while paying some marginal fee for it – the SPDR SPDR MSCI ACWI IMI ETF (with Small Caps) ETF is a decent choice. However, to replicate a benchmark that has more small caps more reliance on a model approach is needed. 

 

You will be relying on a correct sampling by the manager, and less on a more mechanical replication like for the other ETFs listed here (e.g. Vanguard includes c. 3,500 stocks vs. SPDR ACWI IMI c. 1,550). That’s why I wouldn’t prioritise it.

Best Developed Markets ETF

For an Investor looking for a distributing ETF covering only Developed Markets, the HSBC MSCI World UCITS ETF is historically the best performing fund (as mentioned in my article, the non listed above iShares ‘non-Core’ Developed Markets UCITS ETF is too expensive, for now) while for an accumulating ETF the market leader is iShares Core MSCI World UCITS ETF

 

The SPDR Developed Markets UCITS ETF is currently not listed in the above table, due to relatively poor Tracking Difference around inception and shorter track record, but could be considered another possible option given the size of the fund.

 

iShares and Vanguard ETFs while matching the performance Xtrackers would be marginally preferred choices given managers’ reputation (Tier 1)

Best Emerging Markets ETF

With respect to Emerging Markets, iShares Core MSCI EM IMI (including Small Caps)  is the preferred choice with more diversification and a solid track record. 

 

Make sure to select the EM IMI ETF (c. 2,800 holdings), since the ‘non-IMI’ (not listed in the table) is less diversified (c. 950 holdings) for the same fee (note that Tracking Difference for the non-IMI ETF can be misleading since the TER has been revised downwards as mentioned in my article)

 

I have a separate article related to Emerging Country ETF benchmarks, if you want to understand the difference between e.g. MSCI EM IMI and MSCI EM ‘non-IMI’. 

 

As usual, ETFs in this category are ranked by their historical 3-year performance.

BOND ETF SELECTION

Selection Criteria

Key takeaways

Step 1 - Choose your Investment Horizon

Selecting a Bond ETF is more difficult than an Equity ETF, because your needs determine your choice there is usually no ‘clear’ winner.

 

First you need to account for your investment horizon – the higher the duration the better it is suited for long term investing:

 

  • For Bonds the duration or term should broadly match the investment horizon (in years)
  • For Bond ETFs, the horizon may be somewhere between duration and two times duration (read why).

E.g. if your Investment Horizon is 15 years, selecting a Bond with a similar term/duration is reasonable. 

 

However, if you select a Bond ETF, a duration of 8+ years could be a good starting point.

In practice, your choice is fairly limited. Most ETFs have durations around 8-10 years which are adequate for a medium to long term investment horizon.

Duration is the risk you take but also the protection you may get (in case of an Economic downturn) and rebalancing benefit. 

Step 2 - Consider Yield

The yield you get in your currency should be your second criterion, but it is a trade-off with the quality of the underlying Bonds (Government vs Aggregate).

 

Be careful, the Yield from the Factsheet is just part of the story.

 

Aggregate Bond ETF Yield can’t be locked-in. It can be locked-in for Government Bond ETFs. While locking a yield is relatively straightforward for Government Bond ETFs (you can play with my Bond ETF Calculator to understand why), for Aggregate Bond ETFs the return you get may differ.

 

This is because Coporate Bonds trade with an additional spread to Governement Bonds and this may fluctuate over time.

 

For all types, the initial Yield to Maturity is still the best indication of your future return you can get.

 

Don’t forget that in Europe, what counts is the return you will get after accounting for currency hedges.

 

Unfortunately, I have not seen anywhere any proxy for Bond ETF hedged yield. ETF providers only show the unhedged yield, and comparison websites ignore yield altogether.

To simplify your task, I have I calculated in the table above the approximate yield you may aim to get from the ETF including (i) what Bonds generate aka the Factsheet Yield and (ii) the expected hedge return in the first 12 months (the hedges are then rolled).

 

The overall expected yield, after accounting for hedge return can be read in the EUR/GBP Hedged Yield columns.

The universe of possible Bond ETFs for European Investors includes (i) Global Bond ETFs and Local Bond ETFs (e.g. European or UK).

 

In theory, whether you choose a Global fund that is currency hedged or local fund in your currency, the yield will be similar (for a comparable duration).

This is fairly close based on my calculations. In the above table, for Global Bond ETFs the hedged yield broadly ties out with ‘pure’ European or UK Bonds, as the theory predicts. 

 

For example:

 

  • Xtrackers Global Government Bond UCITS ETF Yield EUR Hedged is fairly close to European Government Bond ETFs Yield (in EUR)
  • iShares Global Government Bond UCITS ETF Yield GBP Hedged is broadly in line with iShares Core UK Gilts (in GBP). It is a bit lower, but this is due to lower duration.

 

The Risk/Return logic for Bonds is respected: for any given currency, the higher the duration, the more yield you will get. These are fair estimations, but not certain returns.
 
There could also be minor differences due to imperfect data or different underlying exposures. 
 

That’s why I wouldn’t try to choose an ETF purely because it yields a few basis points more than its rival but rather take a look at all set of selection criteria.

Step 3 - Think about diversification

 Third, for similar yield, you do get extra diversification from Global Bond ETFs and this is something you may want to consider vs. selecting only your regional Bonds. 

 

As explained, unless you have a strong preferrence for your local Government, which could be justified, I would opt for a more diversified ETF.

Step 4 - Your personal situation is important

Fourth, the choice of distributing or accumulating based on your tax situation and need for cash flows is important.

 

The same applies to broker availability

 

Domicile has lower impact than for Equities, since US Bonds are not affected by withholding tax.

 

Step 5 - ETF Fees

Unlike Equity ETFs, for quite a few European hedged Bond ETFs, Tracking Difference may be misleading. 

 

TER/OCF could a a good proxy, in that case. You may (or not) look at costs – all these funds are very competitive from on-going charges perspective. It wouldn’t be my first priority for Bond ETFs. 

 

By the time you have applied the filters from step 1-4 you should already have a solid candidate.

 

 

Good Luck and keep’em* rolling !

(* Wheels & Dividends)

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All information found here, including any ideas, opinions, views, predictions expressed or implied herein, are for informational, entertainment or educational purposes only and do not constitute financial advice. Consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read our full terms and conditions.

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MiCv
MiCv
7 months ago

Dear Raph, thank you for ETF selection tables. However there is some misunderstanding in the text. “For Bond ETFs, the horizon may be somewhere between half of duration and duration (read why). E.g. if your Investment Horizon is 15 years, selecting a Bond with a similar term/duration is reasonable. However, if you select a Bond ETF, a duration of 8+ years could be a good starting point. ” I get this example, it is 2x duration rule presented before. But If I follow instructions from first sentence: if bond etf duration is 8+, then investment horizon is between 4 and… Read more »

MiCv
MiCv
6 months ago
Reply to  Raph Antoine

Everything clear now, thank You for swift correction.

MiCv
MiCv
6 months ago

In European country X savings account interest rate in local banks in currency X is from 1,75% to 2,75% per annum. This yield is tax free, and currency X was stable against EUR last 5 years.
Average UCITS bond ETF factsheet yield is from 0% to 1,15% (from 0% to 0,7% EUR hedged). There are brokerage fees and 15% tax on capital gains in country X.
Why would citizen X for non-risk part of portfolio use bond ETF when domestic savings account seems like a much better choice? Am I missing something?

Maciej
Maciej
6 months ago

Hi Raph, Very interesting stuff. As I do not invest in bonds ETF I was not aware of hedging effect on yield…even not noted any article on that issue. What is your opinion on hedging of long term bonds ETF? I know that it is a good practice to hedge bonds ETF to reduce volatility. However LT bonds have volatility is like equity i.e. higher that currencies so I do not see a rationale to hedge LT ETF bonds. In such case small portion of such bonds can have even a place in non-EUR/USD investor portfolio (I’m aware that this… Read more »

Peter
Peter
6 months ago

Dear Raph, great stuff. This is practical and very informative guide!

What are your thoughts on following:

It is not good practice to mix MSCI with FTSE for equity because different categorization of Developed and Emerging Markets.

What about buying MSCI indexes for equities and FTSE ones for bonds?

Is there any concern?

sbl
sbl
6 months ago

Hi Raph, very good summary. Any reason you have not listed Vanguard’s new UCITS LifeStrategy funds here?

sbl
sbl
6 months ago
Reply to  Raph Antoine

Awesome – and super resources on the site Raph, great work.

Dan
Dan
5 months ago

Hi Raph, I am a Singapore investor. I have enjoyed your articles in the past 2 weeks. Given the limited ETF market and tax reasons, many of us turn to the European counterparts under the iShares and Vanguard brands. Could you also opinion on Vanguard ESG FTSE World All-Cap UTICS ETF?

Dan
Dan
5 months ago
Reply to  Raph Antoine

Have gladly done so. Thanks Raph!

John
John
1 month ago

Very interesting article, thank you! I was just wondering why don’t you speak at all about short-term bonds? Are they not interesting at all due their very low yield (or even a negative real/nominal yield)?

Juan
Juan
1 month ago

Hi Raph, thank you very much for all the interesting articles.
I don’t know if I am the only one but this article is not displaying to me, is it normal?

Roberto Zani
1 month ago

Hi Ralph, I’ve seen in so many portofolio (not simply example, but advises from expert teams, I don’t know if I can write the names…) one etf such as ETF “Core” of the portfolio: Lyxor Core MSCI World (DR) UCITS ETF (LCWD). What do you think about it? Looking your parameters, I think that is very good indeed… And I like to know why you prefer in your list of etf of developed market (for example) the Lyxor shyntetic (shyntetic have a 10% of risk, theoretically)… I hope in your answer and Thank you for all!

Roberto Zani
1 month ago
Reply to  Raph Antoine

Thank you very much Raph, very interesting all your answer… But I need another answer (the last!) for a concrete case: I a have just cheked the lists of ETF MSCI World (developed market) in different web sites for my young son who need to begin to create his portfolio. It seems (from my check on 3 years) that the best ETF that accumulate dividend (in this case acccumulation is better than distribution, as you write) is Invesco MSCI World UCITS ETF ISIN IE00B60SX394. What do you think about it? Thank you so much for your patience.

B.R L
B.R L
25 days ago

Hi Raph, what do you think of the Amundi Prime range? Exposure to market capitalization starting at 5 bps, nobody else offers exposure this cheap. Why not mention those products?

B.R L
B.R L
25 days ago
Reply to  Raph Antoine

Hi Raph, thank you for the insights! The Amundi ETFs do engage in share lending to offset the 15 bps domicile disadvantage, and if you do compare for example EUNL with PRAW, the accumulating Amundi fund do seem to consistently offer better performance than EUNL. Amundi Prime is also getting real close to 500m EUR, do you really think that we are speaking of commercial risks/closure at this stage? And you are correct in that they are tracking different indicies, but as long as the exposure is market capitalization in developed markets, would really difference in index providers be an… Read more »

Last edited 25 days ago by B.R L
B.R L
B.R L
25 days ago
Reply to  Raph Antoine

Thank you for the reply 🙂 I know that Solactive and MSCI do have difference in criteria for what constitutes DM, for example I think that Solactive counts Poland as a DM country, while MSCI does not. If you dont mind explaining, how can a 3% entry/exit fee not impact secondary market? The only reason I can think of is that the entry/exit fee does not apply to market makers/authorized participants, as the alternative would make arbitraging away NAV/trading price discrepancies expensive?

Last edited 25 days ago by B.R L
Roberto
20 days ago

Hi Raph, are you sure that the cost of hedging is so low for an european investor? Somebody told me that is the difference between the interest rate of the Fed and the ECB (from an academic theory), Others that it was established by an agreement between the two central banks in a 2%. Indeed, many etf hedged do not perform well.. Thank you very much.

Mel
Mel
20 days ago

Hello Raph, I have been reading (and learning) a lot with your blog in the past months, I am now building a long term investing strategy with my wife, and I think a Vanguard Lifestrategy 60% Equity ETF would be perfect for our situation, However, Im still a beginner and I struggle to find information regarding performance of this fund against inflation : Does it include inflation linked bonds ? Do you think it is better to invest in Lifestrategy and also in another Inflation linked bonds and/or Gold to hedge against inflation ? Or is it useless ? Thank… Read more »

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