The MoneyWeek exchange-traded fund (ETF) portfolio holds most of its equity allocation in broad funds: US, Europe, Japan and emerging markets.
However, there are many other ways to slice up markets, such as sector, size, factor (stocks with specific characteristics such as high yields or low price/earning ratios), thematic and more.
Given that many companies – especially larger ones – depend on the state of the global economy more than the country where they have their main listing, this may seem like a more sophisticated approach.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How ETFs work
Before considering this, it’s important to note that not all sector funds offer exactly what an investor would expect from their names.
Take the MSCI World Communications Services index, for example, which sounds like it will be mostly telephone companies. Historically, that was largely the case. However, in 2018, changes to the global industry classification standard (GICS) – the industry categories used for companies – put Alphabet, Meta Platforms, Netflix and Disney in the sector. As a result, Alphabet and Meta now account for more than 50% of the index. A tracker for this is not going to behave like a collection of telecommunications stocks (which might be a relief, given the poor long-term returns of many telcos).
Or take consumer discretionary, a category that seems as if it should be about fashion and leisure. Yet about 20% of the index is automakers, which are definitely a big, discretionary purchase but have very different dynamics to McDonald’s.
MoneyWeek’s ETF portfolio
| Row 0 - Cell 0 | Row 0 - Cell 1 |
| Cash (proxied by LSE: TIGB) | 10% |
| iShares $ Treasury Bond GBP Hdgd (LSE: GOVP) | 10% |
| iShares $ TIPS (LSE: ITPS) | 10% |
| iShares Physical Gold (LSE: SGLN) | 10% |
| Vanguard S&P 500 (LSE: VUSA) | 10% |
| Vanguard FTSE Dev. Europe (LSE: VEUR) | 10% |
| Vanguard FTSE Japan (LSE: VJPN) | 10% |
| iShares Core MSCI Em. Markets (LSE: EMIM) | 10% |
| iShares Dev. Market Property Yield (LSE: IWDP) | 10% |
| Vanguard FTSE 250 (LSE: VMID) | 10% |
Another 20% is in Amazon, which is a key part of the consumer economy but is more about logistics and data centres than making and selling goods.
Out of the giant tech megacaps, only Apple and Microsoft fall into the MSCI World Information Technology index. And why Apple, which is as much about fashion and branding as tech (and earns luxury-style margins as a result) and is less a consumer-discretionary stock than Amazon, is not easy to explain.
In any case, given the huge US weighting in this index (almost 90% of the total), arguably a Nasdaq-100 tracker gives much better exposure to tech than a dedicated world tech ETF.
A core of cheap broad funds is best
Not all sector funds are useless. Energy, real estate, healthcare and consumer staples mostly offer what their names imply.
The MoneyWeek portfolio held an energy ETF until recently as a hedge against inflation. It also holds a real-estate income ETF, the next holding to be reviewed, with UK mid caps afterwards.
But building an entire portfolio around sector trackers would be a messy process and would push up costs. Holding a core portfolio of cheap, broad funds and using specialist ETFs to add specific exposures is a more effective option.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
The key October self-assessment tax return deadlines to remember so you can avoid a shock billThere are two important dates for self-assessment taxpayers to remember in October
-
Bank of England’s MPC expected to pause interest rate cutsThe UK economy is weakening, but persistent inflation means experts expect the Bank of England’s Monetary Policy Committee (MPC) to vote against a cut to UK interest rates at this week’s meeting
-
Small UK industrial stocks are hidden gemsOpinion Ed Wielechowski of the Odyssean Investment Trust highlights three of his favourite British small-cap industrial stocks
-
Aurora Innovation is running on empty – is it overvalued?Aurora Innovation, a maker of self-driving trucks, may have promised far more than it can deliver
-
'Ride the recovery in emerging markets': Gustavo Medeiros of Ashmore Group tells MoneyWeekInterview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
What is the Enterprise Investment Scheme and should you have one?The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
The alcohol industry is suffering as consumers sober up – is it still worth investing in the sector?Changing consumer tastes are rocking the alcohol industry, but the best players are adapting their strategies. Buy them while their shares are still cheap
-
A strange calm in creditCorporate bond markets remain remarkably relaxed, with yields that offer little compensation for risks
-
'The City's big bet on green finance fails to pay out'Opinion Insurers and banks are backing away from “green finance”, and there is not much sign of the green boom we were promised. That’s a problem for the City
-
Six top investment trusts for smaller stocksLiquidity constraints mean investment trusts are best placed to seize the juiciest opportunities
