While most investors stick to well-known ETFs, more exotic products are growing in popularity.
For regular followers of our monthly most-bought articles it will not come as a surprise that the iShares Global Clean Energy ETF (LSE:INRG) was the most popular among interactive investor customers in 2021.
The exchange-traded fund (ETF) has experienced high demand since the onset of the Covid-19 pandemic, which saw investors increasingly interested in ethical and green investment options. The ETF was given a further boost by the election of Joe Biden as US president. That enthusiasm has not abated in 2021 and has seemingly been further boosted by the COP26 conference towards the end of the year.
These inflows have not been without their problems. The ETF tracks the S&P Global Clean Energy Index, which initially was composed of just 30 stocks, most of which were mid- and small-cap. That created liquidity concerns. As a research note from SocGen put it: “The problem stems from a cocktail of large money flows in the ETFs replicating an index launched 14 years ago, whose rules seem no longer suitable to the large assets collected by the ETFs.”
As a result, the index provider expanded the number of shares included, loosening inclusion rules. That, of course, meant that there were concerns that the ETF was becoming less “pure play”. The whole issue highlighted the potential trade-off between liquidity and purity for thematic ETFs.
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All these concerns, however, have not dampened appetite among interactive investor customers, who have continued to buy the ETF.
iShares Global Clean Energy was the only thematic ETF to appear on the most-bought list for the year (with the data to 8 December). However, that a thematic ETF is able to bring in more buys than an ETF tracking the big headline indices, such as the S&P 500 or FTSE 100, does suggest the thematic approach is becoming more popular.
Unfortunately, despite the hype and popularity, the ETF’s performance has been rather disappointing this year, losing investors more than 15%. That’s during a year where most regions and indices have provided a decent gain.
The second most-popular ETF on the interactive investor platform was the iShares Core FTSE 100 ETF (LSE:ISF). Its rival, the Vanguard FTSE 100 UCITS ETF (LSE:VUKE), was also among the top 10, sitting in fourth place.
There are several ways to interpret this. First, many of these buys likely reflect investors betting on the recovery of UK assets. Since 2016, plenty of column inches have been devoted to how ‘cheap’ the UK market is. It is worth noting that the Vanguard FTSE 250 UCITS ETF was the seventh most-popular ETF, again potentially reflective of retail investors positioning towards a potential recovery for UK assets.
Yet the popularity of all three ETFs also perhaps points to a lingering feature of UK retail investors: home bias. Surveys and studies continue to show that UK investors are overweight UK shares, regardless of market fundamentals. That several ETFs tracking the UK market are on the list suggests that UK ETF investors also suffer from home bias.
The list also shows that UK retail investors are primarily using ETFs for broad market exposure. Alongside the FTSE 100 tracking funds mentioned above, the list includes the Vanguard S&P 500 UCITS ETF (LSE:VUSD), the iShares Core MSCI World ETF (LSE:IWDA) and the Vanguard FTSE All-World UCITS ETF (LSE:VWRD). It would seem that investors are using ETFs as passive building blocks in their portfolio.
Of course, that isn’t to say that more exotic ETF products aren’t gaining in popularity. Eighth on the list is the WisdomTree FTSE 100 3x Daily Lvrgd ETP (LSE:3UKL). This fund provides triple the daily return of the FTSE 100. Such products are highly risky and can be very destructive if markets go the opposite way.
In 2021, the ETF was a good bet, providing a return of more than 50%, roughly triple the return of the FTSE 100 ETFs mentioned. However, over the longer term, the ETF’s performance will diverge from these, owing to the daily rebalancing effect.
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The promotional literature of many leveraged products specify that they should not be held for more than one day due to this. The supposed appropriate use of these products is day trading. If investors are using them for this purpose, it likely reflects the fund’s position on the list. If investors are using these products as intended, they will be regularly buying and selling, increasing the number of buys recorded on the list.
The sixth most-popular fund on the list is the iShares Physical Gold ETC (LSE:IGLN). After a cracking 2020, driven by Covid-19 fears, the precious metal has struggled so far this year, leaving the ETF down by 2.6%. Yet it seems that investors still see it as part of a diversified portfolio.
|Rank||ETF||Year-to-date return (sterling, total return, %)|
|1||iShares Global Clean Energy ETF (LSE:INRG)||-15.4|
|2||iShares Core FTSE 100 ETF (LSE:ISF)||17.4|
|3||Vanguard S&P 500 UCITS ETF (LSE:VUSD)||30.1|
|4||Vanguard FTSE 100 UCITS ETF (LSE:VUKE)||17.5|
|5||Vanguard FTSE All-World UCITS ETF (LSE:VWRD)||21.1|
|6||iShares Physical Gold ETC (LSE:IGLN)||-2.6|
|7||Vanguard FTSE 250 UCITS ETF (LSE:VMID)||15.3|
|8||WisdomTree FTSE 100 3x Daily Lvrgd ETP (LSE:3UKL)||51.4|
|9||iShares Core MSCI World ETF (LSE:IWDA)||24.6|
|10||Invesco EQQQ NASDAQ-100 ETF GBP (LSE:EQQQ)||31.9|
Source: most-purchased ETFs on ii platform between 1 January 2021 and 29 November 2021. Performance figures from FE Analytics, total return in sterling terms between 1 January 2021 and 8 December 2021.
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.