The increasing number of low-cost, passive investment products – such as exchange-traded funds (ETFs) – on the market has prompted many investors to take greater control of their own portfolios.
Indeed, global flows into exchange-traded equities products reached $27.3bn in May helping to push total industry assets across the $4trn mark, according to product provider BlackRock.
Total year-to-date flows into equities-focused exchange-traded products currently stands at $273.6bn for the first five months, as the below chart shows.
Source: BlackRock
However, home bias means some investors may be doubling up on exposure to their home countries and failing to diversify adequately, according to Oliver Smith, portfolio manager at IG Group.
He said: “Many DIY investor portfolios have a ‘home bias,’ which means that they overweight securities from their own country and have relatively little overseas exposure.
“Global equity ETFs offer investors a cheap way to get diversified exposure to the world’s equity markets, and you only need one or two to achieve this.”
Smith said: “A market capitalisation approach is the simplest way to get exposure. However, over five years to the end of May 2017, global equities returned 115 per cent in sterling terms, with the US market, represented by the S&P 500, up by 145 per cent.
“This outperformance has resulted in the US accounting for an increasingly large weight (59 per cent) in the developed market MSCI World index, which may weigh on returns if the technology rally that has powered IT stocks such as Google, Amazon and Facebook begins to turn.”
He added: “One element to consider, for sterling investors, is whether the returns generated by a weakening pound will reverse over the next few years.
“For example, in 2016 the S&P 500 was up by 11.9 per cent in US dollar terms but a huge 33.6 per cent in GBP terms. Currency-hedged ETFs will protect against such a scenario.
“As the ETF market has matured in recent years, a number of global ETFs have come to the market offering small and mid-cap exposure, or factor exposures such as size, momentum and value.
“These can be a valuable addition to an investor’s toolkit, and we take a look at some of the best.”
Below IG highlights what it considers as some of the best global equity ETFs on offer and explains the investment case for them.
HSBC MSCI World UCITS ETF
The first ETF highlighted by Smith is the HSBC MSCI World Ucits ETF, which aims to replicate the benchmark index and is listed on the London Stock Exchange, Euronext Paris, SIX Swiss Exchange and Xetra Deutsche Börse.
“With a total expense ratio (TER) of 0.15 per cent this stands out as the lowest-cost way of getting market cap exposure to developed market equities,” said Smith.
Performance of ETF and benchmark over 1yr
Source: FE Analytics
Over one year, the ETF has returned 35.09 per cent compared to the benchmark’s 28.71 per cent return and is up by 57.72 per cent over three years. The fund has a tracking error of 0.31 per cent over the last year.
“It has more than 1,600 holdings and a bid-ask spread of just 0.13 per cent. Its weakness is its relatively small market cap size of £195m, which is significantly less than the £8.5bn offering from iShares Core MSCI World,” said Smith.
Vanguard FTSE All World Ucits ETF 
The Vanguard FTSE All World Ucits ETF uses physical replication to track the performance of the market cap-weighted FTSE All World index. The ETF is up by 34.96 per cent over one year and by 56.02 per cent over three years. It has a tracking error of 2.51 over the last year.
Smith said: “This ETF is the best way to get core exposure to developed and emerging market equities in one product. It has a total expense ratio of just 0.25 per cent and fully replicates the underlying index.
“Since launching in 2012 it has performed in-line with the underlying index, and marginally better than the MSCI All Country World Index.
SPDR S&P Global Dividend Aristocrats Ucits ETF
The third fund on the list aims to track the performance of high yielding stocks from around the world. It has an ongoing charge figure (OCF) of 0.45 per cent.
According to the ETF’s factsheet, its index “measures the performance of the highest dividend yielding companies within the S&P Global Broad Market Index that have followed a policy of increasing or stable dividends for at least 10 years”.
The ETF has risen by 27.98 per cent over one year, it has a 12-month historical yield of 3.24 per cent. It has a tracking error of 5.4 over the last year.
“This is a physically-replicating ETF that only invests in stocks that have increased their dividend for at least ten years,” the portfolio manager explained. “It has grown its dividend by 15 per cent over the past three years, and yields 3.2 per cent.
“The country allocation is significantly different to market cap weights, with the US (20.2 per cent), UK (16.3 per cent) and Canada (15.7 per cent) making up the top three.”
iShares MSCI World Size Factor
The iShares Edge MSCI World Size Factor focuses on smaller companies from the broad MSCI World universe, although it has a significant exposure to US and Japanese stocks. Major sectors within the index include industrials, consumer discretionary and financials.
Over one year, the ETF is up by 33.99 per cent, over the past six months the index has risen by 10.43 per cent. It has a tracking error of 2.38 over the last year.
Smith said: “This ETF offers equally weighted exposure to mid-cap stocks that are unlikely to be held in most client portfolios.
“With 34 per cent exposure to the US, compared to 59 per cent in the MSCI World, it offers better country diversification than a market cap index. It has TER of 0.3 per cent.”
iShares Edge MSCI World Minimum Volatility Ucits ETF
One of the final ETFs recommended by IG’s Smith is iShares Edge MSCI World Minimum Volatility. According to the fund factsheet, the product aims track the performance of an index composed of selected companies from developed countries that, in the aggregate, have lower volatility characteristics relative to the broader developed equity markets.
The ETF has risen by 23.37 per cent over the past 12 months and by 74.77 per cent over three years. It has a tracking error of 5.75 over the last year.
Performance of ETF vs sector & benchmark over 3yrs
Source: FE Analytics
“Minimum volatility ETFs have attracted a lot of assets in recent years, and pick stocks that, in aggregate, have lower volatility than a market cap index as they are less correlated to each other,” said Smith.
“This ETF has performed to expectations over the past four years, but critics say that the underlying stocks look too expensive on a historic basis. It has substantial weights to the US (61.5 per cent) and Japan (13.5 per cent), and a TER of 0.3 per cent.”
iShares MSCI World GBP Hedged Ucits ETF
The third iShares product and final global equity ETF highlighted by Smith is the iShares World GBP Hedged ETF, which can help protect against swings in currency.
During the past 12 months the ETF has delivered a 19.76 per cent gain and is up by 24.5 per and 88.18 per cent over three and five years respectively. It has a tracking error of 9.6 over the last year.
“For investors who are concerned about a rally in sterling, this is a good core holding, with an average bid-ask spread of just 0.16 per cent, said Smith
“It should be used in tandem with an unhedged ETF to avoid structural currency shorts in markets which have a large proportion of sales coming from overseas.”
He added: “For instance, the S&P 500 has nearly 50 per cent of sales from overseas, therefore hedging 100 per cent of your exposure would result in an effective US dollar short. The TER is 0.55 per cent.”