Published August 01, 2021
Welcome to The Basics series, where we will detail each step to create an ETF investment portfolio. Let us start with the fund selection and the types of ETFs to look at.
MyETF App includes around 200 ETFs from iShares, which are suitable for European Union investors looking to regularly invest their savings. The funds can be divided into two categories:
The advantage of the former is having additional cash which can be reinvested in the own choice of assets and at the preferred time, while the advantage of the latter is the tax benefit for citizens of countries where dividends are taxable, meaning the reinvestments are compounding without paying the individual tax for each proceeding.
Some countries tax accummulating funds, even if profit was not taken. An example at the time of writing is Germany, where a small portfolio is better kept in a distributed fund where the dividends can be tax exempt for up to 801 euros.
The choice of funds depends on two main aspects:
The risk appetite is strongly correlated with asset class, which can be chosen from equities, bonds, commodities or REITs (Real Estate Investment Trusts). As a rule of thumb, bonds are considered the safest, followed by real estate, equities and commodities. Of course, this depends on the type of bonds and equities, real estate location, and specific commodities.
Investment style means using a further selection criteria based on equity or bond types, allowing you to express your personal preferences, such as company type, industry, region or even ESG ratings (Environmental, Social, and Corporate Governance). The following types are typically considered:
Spreading an investment portfolio across different asset classes and locations from around the globe allows for diversification and can eliminate the correlated risk of certain stock markets.
Looking at the five years before 2020, there is an observed relationship between returns and volatility, with bonds and equities forming two visibly distinct groups. As expected, government and corporate bonds offer the safest choice in terms of volatility, but do not exceed an average of 5% yearly return. Long term government bonds such as iShares Euro Government Bond 15-30yr ETF (Dist), iShares Euro Government Bond 10-15yr ETF (Dist) and iShares USD TIPS ETF USD (Acc) are some of the best performing ETFs.
Although the global basket of commodities, iShares Divers Commodity Swap ETF (Acc), is not particularly volatile, the returns are also small. The better performing emerging markets, such as iShares MSCI Russian ADR/GDR ETF (Acc), iShares MSCI Brazil ETF (Dist), iShares MSCI EM Latin America ETF (Dist) and iShares MSCI South Africa ETF (Acc), more accurately reflect specific commodity cycles, given their economy and stock market is composed of energy and materials companies. The risk in these cases, as seen by iShares MSCI Turkey ETF USD (Dist), is also economic and politic and can lead to equally large losses.
Finally, the developed markets give a relative safety with fewer systematic risks, such as those reflected by the impact of economic, geo-political and financial factors. Some examples include iShares Core S&P 500 ETF USD (Acc), iShares MSCI World ETF USD (Dist), iShares MSCI EMU Large Cap ETF (Acc) and iShares Core EURO STOXX 50 ETF (Acc). Individual countries such as Australia, Canada and Taiwan have had a good performance, together with thematic investment in technology with iShares Nasdaq 100 ETF USD (Acc).
|ETF Name and Category||Returns (%/year)||Volatility (%/year)|
|iShares Euro Gov Bond 15-30yr ETF (Dist)||4.28||8.54|
|iShares Euro Gov Bond 10-15yr ETF (Dist)||2.85||5.50|
|iShares USD TIPS ETF USD (Acc)||2.96||7.27|
|iShares Divers Commodity Swap ETF (Acc)||0.66||13.34|
|iShares MSCI Russian ADR/GDR ETF (Acc)||22.14||23.89|
|iShares MSCI Brazil ETF (Dist)||31.10||18.51|
|iShares MSCI EM Latin America ETF (Dist)||10.53||23.90|
|iShares MSCI South Africa ETF (Acc)||6.06||28.17|
|iShares Core S&P 500 ETF USD (Acc)||11.94||14.13|
|iShares MSCI World ETF USD (Dist)||7.72||13.27|
|iShares MSCI EMU Large Cap ETF (Acc)||6.66||14.78|
|iShares Core EURO STOXX 50 ETF (Acc)||6.33||15.31|
|iShares Nasdaq 100 ETF USD (Acc)||15.44||17.28|