Best UCITS ETFs

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

HANDPICKED LIST

Avoiding drowning in a Sea of ETF Data

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

 

For Equities, online ETF databases list thousands of ETFs. This makes the choice even more confusing. Other websites may list houndreds 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 I think it’s wise 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 in a very competitive landscape. 

I would suggest to take 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 fairly 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 duration is so important for Bond ETFs why are industry leading ETF comparison websites not showing it?”. And that’s just one aspect of Bonds.

 

Frankly, most of 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 preferrence for some ETFs, I have pre-selected some competitors as you may have individual preferrences e.g. related to domicile or dividend distribution type.

This page is summarizing reviews seen on Bankeronwheels.com.

As such it is updated on a periodic basis. 

Taking your perspective

A Long Term Investor View

BEST EQUITY ETFs

Selection Criteria

For Equity ETFs, I have a dedicated post summarizing the most important selection criteria.

 

Have a look before picking your 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 always optimal, either – unless you adjust for investor currency)

 

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

Key takeaways

World ETFs

If you have more time, a dedicated analysis related 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 (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

 

Xtrackers MSCI AC World UCITS ETF and SPDR MSCI ACWI UCITS ETF are 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 good 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).

Developed Countries' ETFs

For an Investor looking for a distributing ETF covering only Developed Markets, the HSBC MSCI World UCITS ETF ETF is the best performing fund (as mentioned in my article, the non listed above iShares non-Core Developed Makrets 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 the managers’ reputation (Tier 1)

Emerging Markets' ETFs

With respect to Emerging MarketsiShares Core MSCI EM IMI (including Small Caps)  is the preferred choice with more small-cap diversification  and 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. 

 

Other ETFs in this category are ranked by their historical 3-year performance.

BEST BOND ETFS

Selection Criteria

Key takeaways

Step 1 - Choose your Investment Horizon

Selecting a Bond ETF is more difficult than an Equity ETF.

 

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 most Bond ETFs, the horizon may be somewhere 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.

 

However, 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 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.

 

First, Aggregate Bond ETF Yield can’t be locked-in. It can be locked-in for Government Bond ETFs.


For both, the initial Yield to Maturity is still the best indication you can get.


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.


Second, 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)

INVESTING GUIDES

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UNDERSTAND BOND ETFs
INVESTING FAQ
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DISCLAIMER

All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice

Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the full disclaimer.


HAVE A QUESTION ABOUT INVESTING?

Drop it below or if you enjoyed my work and found it useful please do leave a comment or share it with someone that may benefit from it – I am grateful for your feedback

Note that this website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis

Good luck and keep’em* rolling!

(*Wheels & Dividends)

Raph

 
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MiCv
MiCv
21 days 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
20 days ago

Everything clear now, thank You for swift correction.

MiCv
MiCv
20 days 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
20 days 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
17 days 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
14 days ago

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

sbl
sbl
13 days ago

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

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