Which ETFs should be in your retirement portfolio?

We name ETF ideas for SIPP investors, highlighting core options and adventurous choices to add spice to a portfolio. 

Which exchange-traded funds (ETFs) should be in your self-invested personal pension (SIPP)? The short answer is: it depends. Different attitudes to risk and investment targets mean there are a variety of answers. However, if you are investing in a SIPP for the next 20 to 30 years, you will still be in the growth phase of your pension journey. For that purpose, there are several options.  

First, we should start with the basic building blocks. One popular way to use ETFs is to adopt a core/satellite approach. This means investing a significant portion (typically around 70%) of your portfolio in an ETF, which gives you exposure to the broad global market of shares. 

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There are several ways to do this. Investors could opt for the iShares Core MSCI World UCITS ETF (LSE:SWDA) or the HSBC MSCI World ETF GBP (LSE:HMWO). Both of these ETFs track a basket of countries across the so-called “developed world”, which covers North America, Europe and parts of Asia-Pacific such as Japan, Hong Kong and Australia. 

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Any investor who opts for this ETF as their “core” holding will be missing exposure to so-called emerging markets (EM) like India, Mexico, Russia, Pakistan, Saudi Arabia, China, and Brazil. These are the economies of tomorrow. So that’s something for young investors, or ones with a long time horizon, to consider. 

To address this, the investor could instead opt for an all-world index, of which there are plenty available. For example, both SPDR® MSCI ACWI ETF GBP (LSE:ACWI) and iShares MSCI ACWI ETF USD Acc GBP (LSE:SSAC) track the MSCI All-Country World Index. Vanguard FTSE All-World UCITS ETF GBP (LSE:VWRL) tracks a similar index. 

Each of the “all-world” ETFs have exposure to emerging markets. However, owing to the relative size of developed markets, they offer quite limited exposure to EM, with only China registering among the top holdings. In the Vanguard FTSE tracker, India, for example, accounts for about 1.2%, roughly the same as the Netherlands.

As a result, an investor could opt to have a developed world index ETF and add their emerging market holdings separately. 

Emerging market growth 

The most popular way to gain exposure to emerging markets is through an ETF which tracks either the MSCI or FTSE emerging market indices. The former can be tracked by the iShares MSCI EM ETF USD Dist GBP (LSE:IEEM) and the latter with Vanguard FTSE Emerging Markets ETF $Dis GBP (LSE:VFEM). 

It used to be the case that the FTSE index was dominated by relatively boring state-owned monopolies, banks or energy firms. There is still plenty of that – however, the rise of China has changed this. The biggest holdings now include fast-growing Chinese tech giants such as Tencent Holdings (SEHK:700), Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Meituan (SEHK:3690). 

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However, those looking for more of a specific emerging market tech option might look at the EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (LSE:EMQQ). This provides exposure to leading internet and ecommerce companies serving emerging markets. 

This ETF is a play on both the tech transformation of emerging markets and the expected growth of middle-class consumption in these countries. However, as you would expect, it is dominated many of the same companies as the above-mentioned emerging market ETFs, so investors should be wary of duplicating holdings. On top of this, like many niche ETFs, it is more expensive than other ETFs, with an annual fee of 0.8%. There are also many other similar niche emerging market ETFs for investors to consider.

Sector satellites and individual countries 

Investors might also want to further enhance their core holdings with exposure to certain fast growing, or exciting sectors that could become increasingly important in the future. For example, there is WisdomTree Cloud Computing ETF USD Acc GBP (LSE:KLWD). Others might think that renewables energy offer long-term growth. For that, there is iShares Global Clean Energy ETF USD Dist GBP (LSE:INRG). There are a lot of these sort of sector ETFs. 

Investors who do wish to allocate to a specific industry should ensure they are only allocating a small part of their portfolio. Many themes come in and out of fashion and investors risk paying premium prices for hyped-up sectors. 

Another option, which carries greater risk, is for investors to pick individual countries. For example, the investor could choose the HSBC MSCI China ETF GBP (LSE:HMCH). Other options include big emerging markets such as India with the iShares MSCI India ETF USD Acc GBP (LSE:IIND). Smaller emerging markets are also an option. For example, there is the HSBC MSCI Indonesia ETF GBP (LSE:HIDR) or the Xtrackers MSCI Philippines ETF 1C GBP (LSE:XPHI). However, this is very risky. Small emerging markets often have underdeveloped and illiquid stock markets, while the risk of currency depreciation (which hurts your holdings) is significant. 

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Investors may also want to try to play investment factors. According to the theory of so-called factor investing, shares that outperform usually have some characteristic – or factor – in common which is responsible for their performance. Factor investing is about identifying those factors by looking at and ‘backtesting’ historical data and investing accordingly.

Over the past 50 years, academics have identified and backtested hundreds of so-called factors. One of the most popular is the ‘momentum’ factor, which assumes that stocks that have gone up in price lately will continue to do so in the future, for some time at least. Also popular is the ‘value’ factor, screening for shares trading at discounted values on the assumption that under-priced shares eventually recover.

For example, UBS ETF MSCI USA Value USD A dis GBP (LSE:UC07) gives exposure to a basket of value stocks. Similar ETFs exist for each of the other factors, such as Xtrackers MSCI World Momentum ETF 1C GBP (LSE:XDEM) for momentum. Investors can opt for ETFs providing exposure to a specific factor as applied to the world market or a particular market, usually the US. For example, SPDR® MSCI USA Value ETF USD Acc GBP (LSE:UVAL) applies the value factor to the US stock market. 

Do young investors need to invest in bonds? 

Finally, investors may want to consider having some bond exposure alongside their core, global market holding. Many investors opt for multi-asset funds that hold a variety of ETFs, with an allocation split between global shares and bonds, such as the Vanguard LifeStrategy 80% Equity A Acc, which is one of interactive investor’s Quick-Start Funds. Vanguard offers various splits between shares and bonds, including 60% and 40% allocation to shares.

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However, one could argue that a younger investor at the start of their investment journey might want to allocate 100% of their portfolio to ETFs that hold only shares. High exposure to stocks is a fairly typical approach for maximising returns when you have a time horizon of 30 years or more.