iShares, Magellan and Vanguard offer ETF options that carry enviable ratings and offer access to lucrative markets and a buffer against market downturns.

Last month marked the entry of two new exchange-traded products on the Australian Securities Exchange, bringing the total number of products to 243. This plethora or competing products is making it harder to select the right funds for your portfolio.

To help, Morningstar analysts provide independent ratings for ETFs. This qualitative rating systems adopts the same "five pillars" methodology used to evaluate traditional unlisted managed mutual funds - process, performance, price, people and parent company.

iShares S&P 500 ETF (IVV)

Morningstar category: Australia Fund Equity North America

This popular ETF tracks the S&P 500 index, the most often cited proxy for the US equity market. It carries a Morningstar Gold rating and has an ultra-low fee, liquidity, a track record of effective implementation, and a diversified portfolio.

"It’s tough to envisage a better US equity vehicle than IVV," says Morningstar senior analyst Alexander Prineas.

An annual fee of 0.04 per cent means this fund is one of the cheapest of all S&P 500 index funds and any other ETF in Australia. Prineas says IVV is not just cheap – but capably managed.

"A large and experienced team runs the $100 billion New York-listed parent ETF, where it has a long record of tracking the benchmark. The Australian vehicle is a cross-listing, meaning investors can tap into the liquidity of the massive primary listing. "

As Prineas notes, the dominance and diversity of American companies means that by purchasing this one ETF, investors gain exposure to a broad portfolio of some of the world’s best companies, including areas that are underrepresented in Australia, such as technology and healthcare.

Magellan Global Equities (MGE)

Morningstar category: Australia Fund Equity World Large Blend

The Magellan Global Equity fund gives investors easy access to a strategy that Morningstar analyst Michael Malseed holds in high regard.

Launched in March 2015, Silver Rated MGE closely mirrors the unlisted Magellan Global Fund but with the trading convenience of a listed vehicle. The product pioneered the new category of exchange-quoted managed funds, or active ETF.

An actively managed ETF has a portfolio manager who is responsible for selecting and managing the fund's investments, unlike passive ETFs which track the performance of index. Active ETFs typically attempt to outperform the index.

MGE’s portfolio of 20-40 stocks is relatively concentrated, composed of companies Magellan believes have enduring competitive advantages, which enable them to generate above-average returns on invested capital. It is constructed with a balance between quality-growth and defensive-value companies.

"The underlying strategy remains one of our top picks in the sector," Malseed said.
The base management fee of 1.35 per cent is relatively expensive and the same price as the unlisted fund.

While MGE offers tangible benefits, Malseed says investors should consider several trade-offs to the listed structure, including brokerage costs, and the potential for spreads to widen unexpectedly, particularly during times of market stress.

Vanguard Australian Fixed Interest ETF (VAF)

Morningstar Category: Australian Fund Bonds

An effective source of diversification during times of market downturn is the Vanguard Australian Fixed Interest Index ETF, says Morningstar analyst Anshula Venkataraman.

The Silver Rated fund tracks the Bloomberg AusBond Composite 0+ Yr Index, which is mostly composed of highly rated government and semi-government bonds. Investment-grade corporate debt and securitised instruments make up the remaining exposure, offering a reasonably diversified Australian bond portfolio.

Venkataraman says VAF's duration and high credit quality mean the product should offer protection when equity markets are weak because high-quality bond prices tend to rise in risk-off environments, providing a stabiliser during equity market downturns.

"For example, the unlisted version of this portfolio posted double-digit returns in 2008 and 2011," she said.

However, a low-yield environment reduces that defensiveness, and investors shouldn't extrapolate a repeat of past returns," she adds.

Despite these risks, Venkataraman says a passive vehicle is an excellent way to get exposure to the Australian bond market.

"Many active strategies charge high fees but take only modest positions against the index, resulting in mediocre performance. By contrast, VAF charges an incredibly low fee of 0.20 per cent," she says.

"VAF has effectively tracked its benchmark since inception and provides a reliable way for investors to gain diversified exposure to the domestic bond market."

 

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