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Exchange-traded funds (ETFs) are becoming increasingly popular with Stocks and Shares ISA investors. I own several to diversify my portfolio, a tactic that reduces risk and gives me exposure to a broad range of investment opportunities.
Here are three top funds I’ll buy for my ISA when I next have spare cash to invest.
Value
Full disclosure. I opened a position in my first fund, the Xtrackers MSCI World Value ETF (LSE:XDEV), over the summer. I’m looking to increase my stake even further.
The fund’s delivered an average yearly return of 6% since it began a decade ago. This is a decent figure, although I think it could deliver a better return looking ahead given that demand for value stocks is gaining momentum.
In total, Xtrackers ETF is invested in 400 large- and mid-cap companies based on a variety of classic value metrics. These include forward price-to-earnings (P/E) and price-to-book (P/B) ratios. Major holdings here include tech shares Cisco, IBM and Intel.
Around 40% of the fund’s tied up in US equities, which leaves it vulnerable to a potential Stateside recession. But exposure to other territories like Japan and the UK helps to reduce this danger.
Growth
Since its creation in 2010, the iShares NASDAQ 100 ETF (LSE:CNDX) has produced a tasty 18.5% average annual return. That’s better than what the S&P 500 and FTSE 100 have both delivered in that time.
The fund’s star performance reflects its high exposure to fast-growth tech shares. Computer hardware and software, telecommunications, and e-commerce shares have risen sharply in value as our lives have been increasingly digitalised.
There seems to be a lot more scope for growth too, thanks to phenomena like artificial intelligence (AI), autonomous driving and quantum computing. This iShares fund has holdings in major players in these fields including Apple, Nvidia and Microsoft.
I am concerned about ETF’s high valuation however. A meaty P/E ratio of 37.8 times leaves it vulnerable to a price correction if market confidence sours. That said, I still believe the potential long-term benefits still makes it worth a very close look.
Dividends
The SPDR S&P Euro Dividend Aristocrats ETF‘s (LSE:EUDV) designed for those seeking reliable and growing dividends over time. And today, its dividend yield’s 3.5%, which is broadly in line with the FTSE 100 average.
This fund focuses on high-yield European companies that’ve raised or held payouts for 10 successive years or more. Through a combination of steady passive income and share price gains, it’s delivered a solid average annual return of 8.1% since its inception in 2012.
In total, this SPDR fund holds 39 different stocks, of which its largest holdings are financial services providers Ageas, Generali and Allianz. However, a large exposure to defensive industries like utilities and consumer staples helps it deliver decent returns even during economic downturns.
I think it’s a great fund to consider, even if its denomination in euros leaves my returns vulnerable to exchange rate movements versus the pound.
