Creating a well-diversified portfolio is critical in helping investors to spread risk and capture growth and income opportunities. This used to be tough for new Individual Savings Accounts (ISAs). Buying a selection of shares requires extensive research and planning, as well as a tonne of transaction costs that can eat into profits.
Fortunately, the growth of the exchange-traded fund (ETF) has made diversifying much easier. Individuals now have thousands of these products — which spreads an investor’s capital across a basket of assets — to choose from.
Buying individual shares is still an important part of a winning portfolio, in my opinion. But ETFs are an effective weapon in building wealth and balancing risk, and especially for new investors.
2 top funds
With this in mind, here are two ETFs that new Stocks and Shares ISA or Lifetime ISA investors might want to consider today.
1. Xtrackers MSCI World Value ETF
The Xtrackers MSCI World Value ETF (LSE:XDEV) invests in shares using a value strategy. More specifically, it takes into account well-used metrics including the forward price-to-earnings (P/E) ratio, price-to-book (P/B) value, and enterprise value-to-cash-flow from operations (EV/CFO) ratio.
Investing in value shares can leave for significant capital appreciation. The theory is that they can rocket in price once the market wises up to their cheapness.
This isn’t the only advantage of investing in value stocks. Such a strategy can also provide investors with a margin of error, as their low valuations often limit the risk of price falls if the company encounters trouble.
The fund helps investors to manage risk in other ways too. It invests in large- and mid-cap companies from developed markets only (like the US, Japan and Britain). In total, it has holdings in more than 400 business spanning a multitude of sectors. These include Cisco Systems, IBM, Toyota and Shell.
With around 40% of earnings sourced from the US, it may be more vulnerable to a Stateside downturn than some other ETFs. But it’s still worth a very close look, in my opinion.
2. L&G Quality Equity Dividends ESG Exclusions UK ETF
Dividends are never, ever guaranteed. And especially during economic downturns when earnings can fall and companies’ financial foundations erode.
The snappily-titled L&G Quality Equity Dividends ESG Exclusions UK ETF (LSE:LDUK) is designed to circumvent these dangers and deliver a solid and reliable passive income over time. In its own words, the fund “seeks to invest in companies distributing income consistently and with the potential to sustain their dividend payouts.”
In doing so, it actively steers clear of firms with weak balance sheets and poor income statements. Major names here include Games Workshop, Barclays, Anglo American and Legal & General.
With a dividend yield of 4.5%, it has the potential to provide a larger passive income than the FTSE 100, whose average yield’s back at 3.6%.
On the downside, this fund invests in a relatively modest 38 companies. So it provides less diversification than ETFs that hold hundreds (or even thousands) of different shares. Still, I believe it could be a good potential buy for dividend-seeking ISA investors to research further.
This post was originally published on Motley Fool
