There are a total of ten changes to the ETF Focus List this year, including new additions to the ‘Tactical Plays’ category.
• Digital technology has dramatically changed the way we consume information, entertainment, goods, and services. Hence, to reflect the increasing digitalisation of our global economy, we have added the Digital Economy into the ‘Core Equity’ category.
• We have also moved China from the ‘Single Market Equity’ category into the ‘Core Equity’ category. Given its economic clout and growing importance to the global economy, we believe the case for a core allocation to China is increasingly compelling.
• New additions to the ‘Tactical Plays’ category include US Internet, Global Financials, Global Healthcare, China Financials, and Cloud Computing.
With more than 2,200 ETFs listed on our platform, choosing the right ETF may not be a simple task, especially for new investors. Thus, we introduced the ETF Focus List in 2018 to guide investors with their ETF selection decisions. The list is updated on an annual basis to ensure that our recommendations remain current and relevant for all investors. This year is no exception – we’re excited to announce that we have just unveiled the latest edition of our ETF Focus List for 2020, using the same in-house methodology as previous years.
As a quick recap, the ETFs on our Focus List are selected based on a set of quantitative and qualitative criteria. For quantitative factors, we assess an ETF’s expense ratio, tracking difference and liquidity (bid-ask spreads and average daily volume). After the quantitative assessment has been made, the ETFs are further evaluated by looking at qualitative factors, such as the underlying index and the structure (physical or synthetic) of the ETF.
We have made several changes to the ETF Focus List this year, and here are some of the notable ones.
#1: Added Digital Economy into the ‘Core Equity’ category
Digital technology has dramatically changed the way we consume information, entertainment, goods, and services. In fact, it has become an indispensable part of our everyday lives. On top of that, the COVID-19 pandemic has further accelerated the adoption of digital technology across all aspects of our life.
If the digital economy were a standalone national economy, it would be the third-largest in the world, behind only the US and China. To reflect the increasing digitalisation of our global economy, we have added Digital Economy into the ‘Core Equity’ category.
The digital economy is a massive web of interconnected stakeholders and supply chains, covering all digital products and services that are enabled by the Internet and other digital technologies. While there is currently no universally agreed definition of the “digital economy”, the digital economy consists of such segments as e-Commerce, e-Services, e-Travel, Fintech, cloud services, and cybersecurity.
As the most powerful applications of digital technologies in the global economy remain largely untapped and are expected to drive massive transformations and disruptions, there are still countless investment opportunities within the digital economy. Therefore, investors should have an allocation to the digital economy in their core portfolios, and one of the most effective ways to do so is through the O’Shares Global Internet Giants ETF (NYSE:OGIG).
China is the second-largest economy in the world, accounting for about 15% of global gross domestic product (GDP). It has also been one of the world’s fastest-growing economies since it first opened up its economy. Yet, China currently accounts for less than 5% of global equity benchmarks.
Given its economic clout and growing importance to the global economy, we believe the case for a core allocation to China is increasingly compelling. Therefore, we have decided to move China from the ‘Single Market Equity’ category into the ‘Core Equity’ category.
#3: Ten new changes to the list
There are ten changes to our ETF Focus List this year (Table 1), most of which are new additions to the list.
US: We have replaced the old ETF with the Vanguard S&P 500 ETF (NYSE:VOO). This is due to a slightly lower expense ratio of 0.04% as compared to the 0.05% charged by iShares Core S&P 500 ETF (NYSE:IVV).
Digital economy: This is a new addition to the ‘Core Equity’ category. Our ETF of choice for the digital economy is the O’Shares Global Internet Giants ETF (NYSE:OGIG), which gives investors exposure to some of the largest global Internet companies that derive most of their revenue from the digital economy. It has a more competitive expense ratio (0.48%), as well as better liquidity compared to its peers.
Total China: There are thousands of publicly-listed Chinese companies categorised into various share classes (A-shares, H-shares, N-chips etc.), yet most China-centric ETFS only provide exposure to one single share class. Hence, a total China ETF is appropriate for investors who wish to obtain complete and diversified exposure to all Chinese companies, regardless of where they are listed. We have chosen the Vanguard Total China Index ETF (HKEX:3169) because it provides investors with comprehensive exposure to approximately 1,000 Chinese companies across all share classes. While it has a higher expense ratio (0.40%) relative to some of its peers, it more than makes up for it with its comprehensive exposure and higher liquidity.
US Internet: This is a new addition to the “Tactical Plays” category. We believe digital technologies are expected to drive massive transformations and disruptions in the coming years and First Trust Dow Jones Internet Index Fund (NYSE:FDN) is a good tool for you to gain exposure to US Internet companies. With an expense ratio of 0.52%, it has the best liquidity amongst its peers, hence making it our recommended US Internet ETF. Investors who prefer exposure to global Internet companies should opt for the O’Shares Global Internet Giants ETF (NYSE:OGIG) instead.
Global financials and global healthcare: Both are new additions to the “Tactical Plays” category. The ETFs chosen are the iShares Global Financials ETF (NYSE:IXG) and the iShares Global Healthcare ETF (NYSE:IXJ). With an expense ratio of 0.46%, both ETFs are chosen for their superior cost-effectiveness and liquidity over their peers.
China financials: This is a new addition to the “Tactical Plays” category. Investors who are keen to ride the long-term trend of China’s financial sector can consider gaining exposure through the Global X MSCI China Financials ETF (NYSE:CHIX). This ETF provides access to almost 100 companies across the entire Chinese financial sector (banks, insurance companies, and capital markets), and we believe it will be a good complement to the BMO Hong Kong Banks ETF (HKEX:3143), which offers targeted exposure to the Chinese banking industry.
Cloud computing: This is a new addition to the “Tactical Plays” category. We live in a data-driven world, where big data is being generated by every digital process. Given the limitations of traditional storage solutions, cloud services have been gaining fast traction. Investors who wish to participate in the upside of this long-term growth story can do so easily using the First Trust Cloud Computing ETF (NASDAQ.SKYY), which has an expense ratio of 0.60% and an average daily volume of approximately 80,000.
Gold: We have replaced the old ETF with SPDR Gold MiniShares (NYSE:GLDM). At just 0.18%, this ETF has one of the lowest expense ratios in the market. It is also much more liquid compared to its peers.
Crude oil: We have replaced the old ETF with the Invesco DB Oil Fund (NYSE:DBO). In light of the structural issues faced by the United States Oil Fund LP (NYSE:USO), we believe it is no longer the best ETF to gain exposure to crude oil prices. While it has a slightly higher expense ratio of 0.78%, investors betting on an oil price rebound can consider the Invesco DB Oil Fund (NYSE:DBO), which utilises a rules-based approach that is intended to minimise roll costs in contango.
Use the ETF Focus List as a starting point for your investing journey
ETFs are a great investment tool for investors who wish to gain exposure to a certain market or sector but do not have the know-how or time to do stock-picking. As such, our ETF Focus List serves as a good starting point for investors who are new to investing. For investors who are holding on to the ETFs that were featured in the ETF Focus List last year but did not make the cut this year, fret not! While these ETFs were excluded, they were beaten by a hair’s breadth by a fellow peer, and remain viable options for your portfolios.They will also continue to be available under the Regular Savings Plan (RSP).
Choosing the right ETF can make the difference between investment success and mediocrity. For this reason, we have formulated the ETF Focus List with the goal of bringing you the best ETFs for every equity and fixed income market across the globe. While it is not designed to be the be-all and end-all list of ETFs that investors can select for their investment portfolios, it serves as a good starting point for investors, guiding them through the wide selection of ETFs that are available on our platform.