With ISA season in full swing, markets have made a relatively strong start to the year and some investors looking to take full advantage of their allowance may wish to add passive exposure to capture this. 
This period – the three months before the new tax year – is when investors routinely rush to make use of the tax-wrapper allowance before the deadline has passed and investors now have less than a month to make use of their £15,240 ISA allowance for 2016/17 which ends on April 5 at the start of the new tax year.
Many could look to passives after the performance of active managers in 2016, who struggled to keep pace due to a shift in style from growth to value and a number of risk-off events that had less of an effect on markets than many expected.
Indeed, most major markets were able to perform well in this environment, with those selected below all producing double-digit returns and beating the relevant IA sector average over the period.
Performance of indices and sector since the start of 2016
Source: FE Analytics
A look back further shows this has been the same trend for the last decade, with each of the above indices ahead of their relevant sectors, showing how difficult it has been for active managers to outperform.
With active managers struggling for the last decade, investors with limited time to research the different universes may wish to add passive exposure this ISA season, rather than attempting to pick one of the few managers who may outperform the market.
As such, below FE Trustnet asks the experts which passive vehicles they are backing this ISA season.
Ben Willis, investment manager at Whitechurch Securities, said: “With several equity markets reaching all-time highs, plenty of areas are looking expensive.
“Generally, we go old axiom of ‘time in the market, not timing the market’ and so any equity investment should be held for the long term, offering the potential for returns even if you invest at these elevated levels.
“I would prefer to seek out relative value opportunities within equity markets, so these picks would only be suitable for those who are comfortable with the risk and who are investing for the long-term.”
His first selection is the L&G UK Mid Cap Index fund, as over the longer term mid-caps tend to outperform their large-cap peers.
Indeed, as the below graph shows, the FTSE 250 has outperformed the FTSE 100 by 51.7 percentage points over the last decade.
Performance of indices over 10yrs
Source: FE Analytics
“Starting at home, I would eschew All Share trackers and look towards relative value in mid-caps,” Willis said.
“The long-term outperformance of mid-caps over large/mega caps over time is well covered and so I think this provides a better relative UK play at the moment.”
Another index tracker investors could look to is the higher risk Vanguard Global Small Cap Index as going even further down the market spectrum can provide even higher returns for investors with the right risk tolerance.
“Again, this provides a higher risk way of gaining exposure to global equity markets. However, there is the opportunity for higher growth potential. Though this tracker is not for the faint-hearted,” he said.
In a similar vein, IG Group portfolio manager Oliver Smith suggests a smart beta option may be the way to go for exposure to the UK market.
“Thematic ETFs sometimes appear an excuse for providers to charge higher fees, to enable investors to chase returns in parts of the market that have recently performed well,” he said.
“However, the iShares Edge MSCI World Size Factor ETF offers good value (0.3 per cent expense ratio), and gives equally weighted exposure to over 900 mid-cap companies which investors are unlikely to get exposure to in actively managed funds.”
Elsewhere, Jason Hollands, managing director at Tilney Group, suggests investors should use passive vehicles for their exposure to the US market.
“The US represents over half of global stock markets and many of us will use products or services from US companies in our daily lives, whether that’s Microsoft, Apple, Johnson & Johnson, PepsiCo, Facebook or Alphabet [Google],” he said.
“This mammoth market is a notoriously difficult one for fund managers to beat, so save some fees and invest in a low index tracker that will follow the overall pattern of the market instead.
“After all, even investment legend Warren Buffett, known as the ‘Sage of Omaha’, has famously admitted that when he dies he will leave instructions for his wife to be invested through such an approach. What’s good for Mrs Buffet sounds good enough for me.
“The Vanguard S&P 500 UCITS ETF is an exchange traded fund, basically a share listed on the London Stock Exchange, which follows the 500 largest US companies for a tiny cost of 0.07 per cent per annum.”
However, a third way investors could play the market this ISA season is through the use of themes rather than geographical location.
Andy Merricks, head of investments at Skerritts Wealth Management, says providing investors are not looking to trade their ISAs then technology themes could be the way to invest.
He suggests the ETFS Robotics and Automation Index as one such solution, with significant advances still to be made in the industry.
“In fairly young sectors like this some companies will become dominant and if you’re in the index you’re going to benefit from that rather than an actively managed type fund which is trying to select which ones will win,” he said.
Since launch the index has performed extremely well, though Merricks adds that the one thing investors need to be aware of with any passive vehicle is that they are going to take a hit whenever the market goes down.
He said: “But for us I think rather than trying to choose geographic regions it makes more sense to invest in a theme such as robotics.
“And that way as well you are spreading you’re risk across different countries as well because you’ve got the US and Japan are quite heavily involved in that index but what you’re not doing is trying to choose which companies are going to become the most successful.”
Another option is the iShares Ageing Population Index, which looks to capitalise on the demographic shifts seen globally.
“The theme is a fairly acknowledged one I think. Populations everywhere are getting older and living longer and with that comes its own problems.
“But there is more and more demand on things such as healthcare which you’ll find in the ageing population index but also financials as more people rely upon savings and investments.
As the above graph shows, since September, both indices have risen more than 16 per cent while since its launch in 2014, the robotics index is up 21.17 per cent.
Performance of indices since September 2016
Source: FE Analytics
Financials make up 42 per cent, while healthcare is 34 per cent and consumer discretionary is 11.7 per cent as it looks to take advantage of elderly spending habits.
“Geographically you are spread again across the US and Japan so you’ve got the split between developed and Asian communities but it’s a theme that again isn’t going away,” he said.
“Demographics has dominated a lot of column inches over recent years and this is a way I think you could benefit from it.”