The cheapest ETFs to track global markets at the start of 2021

by Tom Bailey from interactive investor |

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Our guide to the cheapest ways to access global markets, including the UK, US and emerging markets.  

One of the biggest benefits of investing with exchange-traded funds (ETFs) is that they are cheap. In recent years, ETF providers have also engaged in fierce competition to offer investors the lowest price possible.

Below, we examine some of the cheapest ETFs that are both listed on the London Stock Exchange and available through interactive investor.

United Kingdom

The FTSE 100 is one of the most recognisable indices in the world. As a result, investors can find several very cheap ETFs tracking the index. For instance, both the iShares Core FTSE 100 ETF GBP (LSE: ISFU) and the HSBC FTSE 100 ETF (LSE: HUKX) charge just 0.07%.

However, as cheap as these ETFs are, they are not actually the cheapest way to access the UK market. The Lyxor Core Morningstar UK ETF (LSE: LCUK) charges just 0.04%, making it one of the cheapest ETFs available to UK investors.

LCUK, as its name suggests, does not track the FTSE 100, but the Morningstar UK index, which is slightly different. Whereas the FTSE 100 is the largest 100 companies listed in the UK, the Morningstar index has more than 300 constituents, giving it both large- and mid-cap exposure.

However, the two indices are not that different in practice. Both indices have similar top 10 weightings, and the sheer size of the largest holdings in the Morningstar index crowd out its additional smaller holdings. In 2020, the two indices provided roughly the same performance, both losing just over 11%.

The second cheapest ETF is the L&G UK Equity ETF (LSE: LGUK), with a charge of just 0.05%. This ETF tracks the Solactive Core United Kingdom Large & Mid Cap Index, composed of 104 stocks.

United States

The cheapest way to gain passive exposure to US stocks is not through an ETF tracking the flagship S&P 500 index. Instead, it is the Lyxor Core Morningstar US ETF (LSE: LCUD), which charges just 0.04%. LCUD tracks the Morningstar US index, composed of almost 700 stocks.

The next cheapest ETFs for the US market are Invesco MSCI USA ETF (LSE: MXUS) and Invesco S&P 500 ETF (LSE: SPXP), with both charging just 0.05%. These are the two cheapest ways to gain exposure to either the S&P 500 or the MSCI USA index.

As I recently noted, ETFs tracking the S&P 500 were not necessarily the best way to get passive exposure to the US market in 2020, despite the index’s strong reputation. The S&P 500 has strict and unique inclusion requirements compared to other indices, meaning that it did not include some of the year’s best stocks, such as Tesla (NASDAQ:TSLA) and Zoom (NASDAQ:ZM), resulting in lower performance.

Europe

Passive exposure to Europe is not straightforward, as there is not singular definition of what “Europe” actually is.

The absolute cheapest way to gain exposure to European stocks is through either the Invesco EURO STOXX 50 ETF (LSE:SX5S) or the HSBC EURO STOXX 50 ETF (LSE:H50E). Both charge just 0.05%.

These two ETFs will give you exposure to the EURO STOXX 50 index. This index tracks the 50 biggest stocks from the 11 countries in the eurozone – that is, countries that use the euro. As a result, the index is dominated by France (36%) and Germany (28%). Also accounting for a reasonable share are the Netherlands (12%), Spain (7%) and Italy (5%).

Another option is the Lyxor Core STOXX Europe 600 ETF GBP (LSE:MEUD). This ETF charges 0.07% and tracks the STOXX EUROPE 600 index. Not only is this index larger than the EURO STOXX 50, it is also not restricted to just eurozone markets. As a result, it has around 20% exposure to the UK and 15% to Switzerland.

If investors want a larger index that is restricted to eurozone countries alone, there is the Lyxor EURO STOXX 300 ETF (LSE:MFDD), which also very competitively priced, with a fee of 0.07%.

Global

For those seeking global exposure, one of the cheapest options is the SPDR MSCI World ETF (LSE:SWRD). It tracks the MSCI World index, composed of around 1,500 companies across 23 developed markets, for 0.12%.

The Lyxor Core MSCI World ETF (LSE:LCWD) also uses this index and can be tracked for the same price. Another option is the Vanguard FTSE Dev World ETF GBP (LSE:VEVE). This ETF also charges 0.12% and tracks the very similar FTSE Developed World index.

For those who want their global exposure to also include emerging markets, the ETFs are slightly more expensive. For example, there is the iShares MSCI ACWI ETF (LSE:ISAC), which charges 0.22%. Alternatively, there is the Vanguard FTSE All-World UCITS ETF (LSE:VWRD), which also charges 0.22%. Both track indices trying to replicate the entirety of the global stock market.

Emerging markets

Generally, it is more expensive to track emerging markets with ETFs. The index is less traded and composed of less liquid stocks.

However, that is not to say exposure cannot be achieved at a reasonable price. The HSBC MSCI Emerging Markets ETF GBP (LSE:HMEF) is the cheapest on interactive investor, charging 0.15%. It tracks the MSCI Emerging Market index, composed of around 1,400 large- and mid-cap stocks.

The second cheapest option is the iShares Core MSCI EM IMI ETF (LSE: EIMI), which charges 0.18%. It tracks the MSCI Emerging Markets Investable Market Index. In contrast to the other index, this one also includes small-cap stocks, giving it just over 3,000 constituents. There is also an ESG-screened version of this ETF for the same fee: the iShares MSCI EM IMI ESG Screened UCITS ETF (LSE: SEGM).

China

China dominates the emerging market index, with a weighting of almost 40%. However, for those who specifically want China exposure, there are several competitively priced ETFs.

The cheapest is the Franklin FTSE China UCITS ETF (LSE:FRCH) with an ongoing charge of 0.19%. The ETF tracks the FTSE China 30/18 Capped Index. This index is composed of 872 Chinese companies. As the index’s factsheet notes: “To limit over-concentration in any single security, constituents are capped quarterly so the largest company’s weight does not exceed 30% and any remaining company weight does not exceed 18%.”

The second cheapest China-focused ETF is a whole 10 basis points more, with the Lyxor MSCI China ETF (LSE:LCCN) charging 0.29%. This ETF tracks the MSCI China index.

Asia-Pacific

For the broader Asia-Pacific region, the cheapest option is the L&G Asia Pacific ex Japan Equity ETF (LSE:LGAP), which has a charge of 0.11%. This ETF tracks the Solactive Core Developed Markets Pacific ex Japan Large & Mid Cap index. Its biggest weighting is Australia, accounting for more than 50%, followed by Hong Kong at 20%.

The next cheapest is the Vanguard FTSE Developed Asia Pacific ex Japan ETF (LSE:VDPX), for 0.15%. This tracks a slightly different index, the FTSE Developed Asia Pacific ex Japan index. Australia is still the biggest holding, accounting for around 40%. This is followed by Korean equities, at around 30%.

Japan

Active funds are often viewed by investors as a more favourable route for Japan exposure. However, Japan is one of the most efficient markets in the world, so investors might want to consider passive exposure. If they do, there are several reasonably priced options.

The cheapest is the Xtrackers Nikkei 225 ETF (LSE:XDJP), which charges just 0.09%, and tracks the famous Nikkei 225 index.

This index is price-weighted, not market-capitalisation-weighted. In a price-weighted index, the trading prices of stocks determine how much of the index they comprise. Many investors view this method of weighting as inferior to a market capitalisation index, in which the proportion that each company represents in the index is the result of the size of its market capitalisation.

For just one basis point more, investors can buy a market-cap weighted ETF, the L&G Japan Equity ETF (LSE:LGJP). This ETF charges 0.10% to track the Solactive Core Japan Large & Mid Cap Index, which is supposed to give exposure to large- and mid-cap publicly traded Japanese companies, with some ESG screening.

The third-cheapest Japan option is  the Lyxor Core MSCI Japan ETF (LSE:LCJD), which tracks the MSCI Japan index for 0.12%.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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