• In the year’s edition of our ETF Focus List, there are a total of 18 changes, which consists of some additions and removals of certain sub-categories. We have also streamlined some of these sub-categories, to provide investors with a clearer view of the options available when selecting ETFs to include in their portfolios.
• For exposure to China A-Shares, we recommend the E Fund CSI 300 ETF (SSE:510310), listed on the Shanghai Stock Exchange, as onshore A-Share ETFs are generally more liquid, have lower expense ratios and have larger AUMs compared to ETFs listed on HKEX or the US/EU exchanges.
• As we head into a challenging economic environment, resiliency is important and thus we have replaced the ALPS O’Shares Global Internet Giants ETF (BATS:OGIG) with the Invesco Nasdaq Internet ETF (NASDAQ:PNQI), which has a larger exposure to Big Tech and more profitable companies.
• Following through with our preference to quality and value companies, we have added two new sub-categories under our “Core Equity” category, namely US Quality and US Value.
With more than 3,500 ETFs listed on our platform choosing the right ETF for your portfolio can be a daunting task, especially for new investors. In order to better aid investors scope through the tremendous number of ETFs available on various exchanges, we first introduced our ETF Focus List in 2018, with the goal of bringing investors the best-in-class ETFs for every equity and fixed income markets across the globe.
The selection process for our ETF Focus List is based on a set of quantitative and qualitative factors. Quantitative factors include expense ratio, liquidity, and tracking difference. Meanwhile, the qualitative factors that we consider are the underlying index and structure of the ETF.
Our ETF Focus List is updated annually to ensure that our recommendations remain relevant and up to date for investors. For 2023, we have also done a refresh of our ETF Focus List, which consists of 18 changes in order to feature a wider range of ETFs the world has to offer.
E Fund CSI 300 ETF (SSE:510310) – our new China A-Share recommended ETF
As a house, although we have maintained a negative view on Chinese equities ever since late 2022, we are positive on onshore China A-Shares. China A shares refer to Chinese stocks listed on either the Shanghai or Shenzhen Stock Exchange. One of the most commonly used benchmark indices for China A-Shares is the CSI 300 index, which tracks the top 300 stocks traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
As China moves towards a top-down state-controlled economy, it is now more important than ever to align their portfolios with China’s priorities: that means investing more in SOEs and companies that operate in favoured industries (E.g. green energy, electric vehicles, semiconductors, advanced manufacturing and automation).
It is worth noting that the A-share market should continue to enjoy policy support given President Xi’s desire to develop a robust onshore capital market to boost tech fundraising. Given that most of the companies are found in the A-share market, stocks found in the CSI 300 Index should be relatively more resilient compared to the offshore market where foreign investor confidence remains fragile. Thus, the investment opportunities within China are likely found in the onshore markets.
In the previous edition of our ETF Focus List, we recommended the iShares Core CSI 300 ETF (HKEX:2846) for exposure to China A-Shares The reason for this change is because the E Fund CSI 300 ETF (SSE:510310) has a larger AUM, higher liquidity, lower expense ratio and tighter bid-ask spreads, which makes it more cost efficient for investors.
For investors who already have a Regular Savings Plan (RSP) for the iShares Core CSI 300 ETF (HKEX:2846) or simply prefer to invest in non-onshore listed exchanges, do not worry as it is still a terrific ETF which tracks the CSI 300 Index.
Table 1: Key information for the respective ETFs
|
|
2022 |
2023 |
|
Recommended ETF |
||
|
Underlying Index |
CSI 300 Index |
CSI 300 Index |
|
Constituents |
Exposure to the 300 largest China A-Share companies |
Exposure to the 300 largest China A-Share companies |
|
Expense Ratio |
0.38% |
0.20% |
|
Source: Bloomberg Finance L.P., Wind Financial Terminal, iFAST Compilations Data as of April 2023 |
||
Invesco Nasdaq Internet ETF (NASDAQ:PNQI) – our new Digital Economy recommended ETF
Despite their poor performance in 2022, investors continue to love technology stocks as they are often associated with growth and capital appreciation.
Although growth and technology stocks are likely to meet challenges ahead in the near term, it is difficult to deny their growing importance in the world that we live in today. Therefore, we believe that the digital economy still remains an important piece of the global economy and investors’ portfolios.
Across the longer-term horizon, we remain optimistic in technology stocks, especially the larger and more profitable names, which are better positioned to weather the upcoming storm, where interest rates are expected to stay higher for longer and inflation remains sticky. Therefore, we recommend the Invesco NASDAQ Internet ETF (NASDAQ:PNQI), which has a majority of its allocation to Big Tech companies such as Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Meta (NASDAQ:META).
Aside from the higher exposure to Big Tech and profitable companies, PNQI also ranks well among its peers when put through our ETF selection methodology. While it is slightly more expensive compared to OGIG in terms of the expense ratio – 0.48% for OGIG vs. 0.60% for PNQI – PNQI makes up for it by having much better liquidity, as can be seen from its higher trading volume and tighter bid-ask spread.
In conclusion, both ETFs have their benefits. The ALPS O'Shares Global Internet Giants ETF (BATS:OGIG) would be more suitable for investors who are seeking higher returns through exposure to high growth names, while the Invesco NASDAQ Internet ETF (NASDAQ:PNQI) would be a better option for investors who wish to gain exposure to Big Tech companies, which are likely to be more resilient in a downturn.
Table 2: Comparison between PNQI and OGIG
|
ETF |
Fund Total Assets (USD Million) |
Expense Ratio |
Average 90 Day Volume |
Average Bid-Ask Spread Percentage |
3 Year Tracking Difference |
|
517 |
0.60% |
75,196 |
0.05 |
-1.51% |
|
|
127 |
0.48% |
29,832 |
0.09 |
-1.45% |
|
|
Source: Bloomberg Finance L.P. Data as of April 2023 |
|||||
Related Article: Picking the winners within the technology sector as challenges lie ahead
Added US Quality and US Value into “Core Equity” category
The performance of high-quality companies in the long run cannot be understated. Over the past two decades, high-quality companies have outperformed the broader market by a significant margin. High-quality companies tend to experience much smaller earnings per share (EPS) declines relative to other companies. They are also less likely to see drastic negative revisions to EPS estimates, which can help to support valuations. Furthermore, high-quality companies have also proven to have a lower maximum drawdown even during recessions.
The shift in the macro backdrop – from low inflation and near-zero policy rates to high inflation and decade-high policy rates – has greatly bolstered earnings of the key sectors overweight in the US Value composition, which includes Financials, Industrials, Materials, Energy, Healthcare and Consumer Staples. These sectors have remained resilient in their earnings, given the smaller exposure to unprofitable, growth and long duration equities.
In conclusion, higher-for-longer inflation and interest rates are pushing the US economy to the brink of a recession. These are times when exposure to high-quality and value companies may be beneficial to investors’ portfolios. For these reasons, we have decided to include the US Quality and US Value sub-categories in this year’s ETF Focus List.
For the US Quality sub-category, we recommend the JPMorgan US Quality Factor ETF (NYSE:JQUA). As for the US Value sub-category our top pick is the Vanguard Value ETF (NYSE:VTV).
Table 3: Key information for JQUA and VTV
|
ETF |
Fund Total Assets (USD Million) |
Expense Ratio |
Average 90 Day Volume |
Average Bid-Ask Spread Percentage |
3 Year Tracking Difference |
|
1,196 |
0.12% |
213,560 |
0.03 |
-0.71% |
|
|
100,929 |
0.04% |
2,390,637 |
0.02 |
+0.11% |
|
|
Source: Bloomberg Finance L.P. Data as of April 2023 |
|||||
Related Article: Rise of the underdog. The comeback of US Value stocks
Removed China Property Bond from “Fixed Income” category
Following China’s real estate crisis, we have taken on a more defensive stance on high yield bonds issued by Chinese property developers. Moving forward, the property sector's role in driving China's economy is expected to diminish. Coupled with weak liquidity profiles and authorities' tough stance on the sector, we believe that there may be substantial risk involved in investing in ETF that is focused solely on China property bonds. Investors who still wish to gain exposure to Chinese property bonds may opt for a more diversified instrument such as our recommended iShares Barclays Capital USD Asia High Yield Bond Index ETF (SGX:O9P).
Removed Greater China from “Regional Equity” category
Given the delisting of our recommended ETF, SPDR® FTSE Greater China ETF, and the lack of viable ETFs on our platform, we have decided to remove this sub-category. Investors who are keen on investing in this region can head over to our Recommended Fund List, which will also be going through a refresh in July this year.
Revamped “Commodity” category
In order to provide a more comprehensive and representative view of the commodity category, we have moved Agribusiness and Metals from the “Tactical Plays” category, though the recommended ETFs for these respective sub-categories remain the same.
For the Energy sub-category, instead of an ETF which tracks oil futures, we have chosen the Energy Select Sector SPDR Fund (NYSE:XLE) that tracks predominately the major oil companies.
Next, in order to provide investors with a comprehensive ETF that spans the overall commodity space, we added a new sub-category called Global Resources, where we recommend the SPDR S&P Global Natural Resources ETF (NYSE:GNR).
Table 3: Summary of changes made to the “Commodity” category
|
Sub-Category |
2022 |
2023 |
|
Agribusiness |
VanEck Agribusiness ETF (NYSE:MOO) |
|
|
Energy |
Invesco DB Oil Fund (NYSE:DBO) |
|
|
Global Resources |
- |
|
|
Metals |
VanEck Rare Earth/Strategic Metals ETF (NYSE:REMX) |
Other key changes to the list
Besides the changes already mentioned above, we have also made several changes to the “Tactical Plays” Category.
Removals:
Firstly, we have removed China Banks and China Real Estate from the “Tactical Plays” category. At present, our tactical plays category is crowded with China sectoral ETFs. In line with the removal of China Property Bonds, we have also opted to remove this ETF. In the long term, the profitability of private developers is expected to be threatened with China’s shift to a top-down state-controlled economy.
Next, to condense and streamline the exposure to the US technology sector, we have removed US Internet and US Tech, as there are significant overlaps with the Digital Economy sub-category under “Core Equity”.
Changes:
Besides these removals, we continue to make new additions and changes to our ETF Focus List under the “Tactical Plays” category, as we foresee strong secular drivers for the following thematic sectors:
China Electric Vehicles: Continuing on last year’s inclusion of this sub-category, we continue to believe the Chinese electric vehicle market will be supported by government policies and propelled forward by supply chain integration and manufacturing proficiency. This year, we have changed the recommended ETF to the Global X China Electric Vehicle ETF (HKEX:2845), given its larger AUM, higher liquidity and lower expense ratio. This ETF also consists of only A-Shares, which is likely to outperform shares listed on the offshore markets.
Table 4: Summary of changes to the “Tactical Plays” Category
|
2022 |
2023 |
|
|
China Electric Vehicles |
NikkoAM-Straits Trading MSCI China Electric Vehicles and Future Mobility ETF (SGX:EVS) |
Additions:
US Consumer Staples: This is the only new addition to the “Tactical Plays” category. With elevated inflation and rising recession risk, we recommend investors to adopt a defensive stance. Goods from the consumer staples sub-category should continue to enjoy a steady demand even during recession, or other emergencies, such as pandemics. Investors who are keen to invest in this sector can do so using the Consumer Staples Select Sector SPDR Fund (NYSE:XLP).
Table 5: Key information for XLP
|
ETF |
Fund Total Assets (USD Million) |
Expense Ratio |
Average 90 Day Volume |
Average Bid-Ask Spread Percentage |
3 Year Tracking Difference |
|
18,955 |
0.10% |
10,847,119 |
0.01 |
-0.49% |
|
|
Source: Bloomberg Finance L.P. Data as of April 2023 |
|||||
A starting point for your investment journey
The objective of our ETF Focus List is to serve as a good starting point for investors by zeroing in on the best-in-class ETFs from the vast number of options available on our platform.
While ETFs are not the only investment products that investors can select for their investment portfolios, they still serve as great investment tools that allow investors to gain diversified exposure to markets at a low cost.
As for the ETFs which have been removed or replaced, investors who are holding on to them should not be worried as they remain viable investment options. They will also continue to be available under the Regular Savings Plan (RSP), along with the new additions. However, do note that China onshore listed ETFs are currently not available for RSP, so do consider the offshore alternatives if you are interested.
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