There’s a view that major central banks will start to cut interest rates in 2024, but not because of a recession. This is the so-called goldilocks scenario, suggesting everything will be mostly perfect. We aren’t quite as sure, so our five exchange traded funds (ETFs) to watch for 2024 have more of a cautious tone.
But economic concerns shouldn’t stop you investing. While volatility is likely through 2024, this could be a great opportunity to pick up reasonably-priced stocks with international revenues, attractive dividends, good dividend cover and strong balance sheets for the long term.
Investing in ETFs isn’t right for everyone. Investors should only invest if the ETF’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. You should understand the specific risks before investing, and make sure any new investment forms part of a diversified portfolio.
This isn’t personal advice or a recommendation to invest. Remember, all investments and any income they produce can fall as well as rise in value so you could get back less than you invested. Past performance is not a guide to future returns. If you’re not sure an investment is right for you, ask for financial advice.
Information correct as at 21 December 2023, unless otherwise stated.
As ETFs trade like shares, both a buy and sell instruction will be subject to share dealing charges within your Hargreaves Lansdown account except in a Junior ISA.
What are ETFs?
An ETF is a basket of investments that usually includes shares or bonds. They tend to track the performance of an index like the FTSE 100 and trade like shares on stock exchanges. This means their prices fluctuate throughout the day.
Lots of ETFs use securities lending to try to generate additional returns that help pay for the costs of running them. This adds risk. The only ETF listed below that doesn’t use securities lending is the Vanguard Global Aggregate Bond ETF.
All of the ETFs below have the flexibility to use derivatives, which increases risk. Please note as the ETFs below are domiciled outside of the UK, they are not normally covered by the UK Financial Services Compensation Scheme.
Global Bonds – Vanguard Global Aggregate Bond ETF
Vanguard is a pioneer when it comes to passive investing, they created the first retail index fund over 45 years ago. It’s now running some of the largest index funds in the world.
Given its size, it has a big investment team with expertise and resources to help its ETFs track indices and markets as closely as possible. This scale also helps keep costs down.
The Vanguard Global Aggregate Bond ETF gives exposure to a range of fixed income investments. Its benchmark, the Bloomberg Global Aggregate Index Hedged GBP, is made up of a mixture of around 29,600 global bonds.
The index has a bias towards global government bonds, while the rest invests in bonds issued by companies. These are all investment grade bonds that are considered more likely to pay off their debts than some higher-risk bonds, like high-yield bonds.
The ETF invests in around a third of the number of constituents in its benchmark, which is known as partial replication. This helps keep costs down as the ETF doesn’t buy and sell every bond that’s added to or removed from the index. The ETF also invests in higher-risk emerging markets in line with the benchmark.
The team uses currency hedging to convert overseas currency bonds back to sterling. The prices and income of global bonds can fluctuate with foreign currency movements, adding volatility for UK investors.
By hedging, investors could experience less extreme price movements over time, which helps smooth potential returns. That said, currency hedging is done through derivatives which adds risk.
This ETF could provide a different type of return and help diversify an investment portfolio that already has exposure to company shares or overseas currencies.
More on Vanguard Global Aggregate Bond ETF including charges
Vanguard Global Aggregate Bond ETF Key Investor Information
GBP Investment Grade Bonds – iShares Core GBP Corporate Bond ETF
Right now, BlackRock is the biggest asset manager in the world, running over $9trn globally as of November 2023.
The iShares brand represents BlackRock's family of index tracking and exchange traded funds. Being such a big player in index tracking gives BlackRock unique access to the marketplace, which can help lower trading costs.
The iShares Core GBP Corporate Bond ETF offers a low-cost option for tracking the performance of the Markit iBoxx GBP Liquid Corporates Large Cap Index. The index offers diverse exposure to investment grade bonds issued in GBP. There are bonds from sectors including industrials, utilities and financials.
This ETF also uses partial replication. This means it tracks the benchmark by investing in almost every bond in it, but not all.
In any index tracker fund, taxes, dealing commissions and the cost of running the fund all drag on performance. To help keep these costs down, the team uses cash to make large purchases instead of lots of small transactions.
The fund also has tracking error targets, which measure how closely it's tracking its benchmark. BlackRock monitor this on a daily and monthly basis to make sure the fund is closely following the index.
This ETF could provide bond exposure for an investment portfolio focused on company shares or diversify a portfolio that already invests in government bonds.
More on iShares Core GBP Corporate Bond ETF including charges
iShares Core GBP Corporate Bond ETF Key Investor Information
UK Equity – iShares UK Dividend ETF
The iShares UK Dividend ETF offers a low-cost option for tracking the performance of the FTSE Dividend UK+ index.
The index offers exposure to 50 of the highest dividend-paying stocks listed in the UK, while still making sure it’s diversified across multiple sectors. The sectors it invests most in are financials, consumer staples and materials.
It tracks the benchmark by investing in every stock in the index. This is known as full replication. Like with the iShares Core GBP Corporate Bond ETF, to help keep costs down, the team use cash to make large purchases instead of lots of small transactions.
This ETF could provide income in a portfolio focused on growth, or diversify a portfolio that is focused on bonds.
More on iShares UK Dividend ETF including charges
iShares UK Dividend ETF Key Investor Information
Emerging Market Equity – Vanguard FTSE Emerging Markets ETF
The Vanguard FTSE Emerging Markets ETF offers a low-cost option for tracking the performance of the FTSE Emerging Index.
The fund uses partial replication, investing in nearly all the underlying companies of the index, and in line with each company’s index weight. Companies that make up a very small part of the index are sometimes not held as they can be more difficult or expensive to buy and sell.
So, the index offers exposure to a range of large and medium-sized companies in emerging markets like China, India and Taiwan. These markets are higher risk because they're at an earlier stage of development.
This fund should only be considered for a portfolio with a longer investment outlook that can accept periods of lots of volatility.
This ETF could provide some growth to a conservatively invested portfolio or provide some diversification to a portfolio focused on developed markets.
More on Vanguard FTSE Emerging Markets ETF including charges
Vanguard FTSE Emerging Markets ETF Key Investor Information
Global Equity – Vanguard FTSE All-World High Dividend Yield ETF
The Vanguard FTSE All-World High Dividend Yield ETF offers a low-cost solution for tracking the performance of the FTSE All-World High Dividend Yield Index.
The index is made up of large and medium-sized company stocks in developed and higher-risk emerging markets that pay dividends that are generally higher than average.
Real estate investment trusts aren’t included in the index, and neither are stocks that forecast a zero dividend over the next 12 months.
With the focus on income, there’s a high amount invested in the financial sector which makes up around a quarter of the ETF, followed by consumer staples, energy and health care. In terms of regions, the US, Japan and UK are the three largest country weightings.
This ETF could be used to increase the income potential from an investment portfolio, or to diversify a portfolio focused on capital growth.
More on Vanguard FTSE All-World High Dividend Yield ETF including charges
Vanguard FTSE All-World High Dividend Yield ETF Key Investor Information
Want to see how these ETFs get on in 2024?
Watchlists let you track investments without spending real money. Set one up to follow the performance, create your own watchlist or copy the details of real holdings.
To follow these ETFs, use the ‘add to watchlist’ button below the name of each ETF. Then log in to your account to keep track online or with the HL mobile app.
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