Why We Don’t Do ETF Ratings At Hargreaves Lansdown

Over the next few years, we’ll be talking more about ETF rankings. Many firms are in the process of rating the myriad of ETPs currently available in the UK; now into the thousands. Two firms – Financial Express and Koris International – have already launched quantitative rankings and ETFs have made their way onto some retail stockbrokers’ buy lists.

As an ETF researcher, I take a keen interest. My ambition is to help investors make the right choice and the ETF market is confusing. There are thousands available from dozens of issuers. Investors in the UK can easily buy ETFs listed not just in the UK,but in Europe and North America too. But we do not presently have a list of favourite ETFs, and here are the reasons why.

Not The Mainstream

Most investors use traditional funds (unit trusts and OEICs) as buy and hold investments. Roughly 80 tracker funds are available for UK investors and our clients generally use them for core portfolio assets, buying for the long run.

By comparison ETFs are used in many different ways. Some investors also take strategic positions – buying low cost mainstream products as a long term investment. But we also know traders use ETFs – buying tactically with shorter holding periods.

Different Needs, Different ETFs

Different ETFs will therefore be appropriate to each type of investor. Take the market for Chinese A-Shares. The CSOP Source FTSE China A50 UCITS ETF (CHNP) has an ongoing charge of 1.11 percent, tracks the FTSE China A50 Index and is one of the most liquid ETFs. Its average bid-offer spread on the London Stock Exchange was 0.88 percent in July. For a short term tactical trade of £10,000, spread and fees account equate to around £100.

On the other hand, take the new iShares MSCI China A UCITS ETF (IASH) whose spread averaged over 2.5 percent, almost three times higher. Holding for two months equates to around £270 but as a long term investor I’d rather buy the iShares ETF. Over ten years, my expected costs would be lower in IASH by a quarter and I’d expect spreads to fall as it matures. Furthermore the MSCI China A International Index tracked by iShares is much more diversified than the narrow index used by Source – important for a long term holder.

Income is another complication in ETF selection. Most funds offer both income and accumulation units – most ETF issuers don’t. The iShares Core S&P 500 UCITS ETF (CSPX) reinvests income with ongoing charge 0.07 percent. Its income-distributing sister iShares S&P 500 UCITS ETF (IUSA) costs 0.40 percent per annum. Income seeking investors would be better with Vanguard S&P 500 ETF (VUSA), ongoing charge 0.07 percent.

Do Ratings Help Investors?

Of course, we could address each aspect by ranking ETFs under different metrics and compiling parallel lists to correspond with different portfolio objectives. But the point of a preferred list is to simplify the choice for investors. If you need a flowchart to find the right recommended list, does it make things easier?

The other problem is that ETFs are much more dynamic than traditional funds. Spreads change throughout the day and over time, as investor inflows and outflows oscillate. Certain products may be at a discount or premium at different points. And at times, different indices will be more appropriate than others. When things change, it’s difficult to give recommendations that will be relevant for the long run.

So we’ve decided an ETF recommended list would not is not right at present. That could change in the future, but for the moment we think there are better ways to help ETF investors. Like search tools to help sift through the thousands on offer, or putting ETF information in one place to allow investors to compare and find the right product for their needs at each moment.

My advice: if you are looking for an ETF, take advantage of the ratings available. Compare information from different sources before making your decision. But remember the key thing is to ensure your investment suits you and your portfolio. Not just what a research firm deems important.

Adam Laird is in charge of research in ETFs and passive investments at Hargreaves Lansdown. Hargreaves Lansdown is an investment platform which caters for individual investors, and compiles a list of favourite tracker funds (the Core Tracker list), endorsing high quality funds to help investors make the right decisions. HL also has a list of top actively managed funds – the Wealth 150 list.