Today, the London Stock Exchange hosts more than 1,700 exchange-traded funds (ETFs). The popularity of these products has rocketed among investors seeking a cheap and simple way to diversify their portfolios.
But viewing such funds as merely risk-reduction tools would be doing them a grave injustice. Many ETFs have delivered long-term returns that leave countless FTSE 100 and FTSE 250 shares in the dust.
Take the following two ETFs I’m about to discuss. Combined, they’ve delivered an average annual return of 13.5% over the past five years.
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Based on this, £20,000 invested equally across these funds in early 2020 would have almost doubled an investor’s money, generating a total return of £39,133.
Past performance is no guarantee of future returns, but here’s why I think they’re worth considering right now.
Security guard
Artificial intelligence (AI) isn’t the only hot tech trend in town. Companies involved in the field of cybersecurity also have terrific growth potential.
Data’s very much a 21st century currency, and modern societies are becoming increasingly reliant on technology to function and evolve. This makes protection against the growing number of online threats critical.
Analysts at Gartner think the global cybersecurity market will soar from $162bn in 2023 to more than $435bn by 2030. The trouble is that tipping specific winners in this field is tough, given the breakneck pace at which tech markets evolve.
The Global X Cybersecurity ETF (LSE:BUGG) — which has delivered an average annual return of 15.7% in the last five years — helps to reduce this threat. In total, it has holdings in 22 different software, services and hardware providers.
These range from big hitters such as CrowdStrike and Palo Alto to smaller ones with (arguably) greater growth potential like Telos.
There are drawbacks to purchasing focused ETFs like this. They often command higher management fees that can eat into shareholder returns. In this case, the total expense ratio is 0.5%, which is greater than that typically found on basic index trackers.
But on balance, I think that fee could be a small price to gain exposure to this high-growth tech sector.
Let’s be Frank
Targeting particular geographies can be an effective wealth-building strategy too. Franklin FTSE India ETF’s (LSE:FLXI) one country-specific fund whose recent performance has grabbed my attention.
This Franklin Templeton product — which invests in large- and mid-cap stocks in India — has delivered an 11.3% average annual return since early 2020.
The fund’s soared in value as India’s booming economy has supercharged corporate earnings. Such strong returns aren’t guaranteed in future, but a vibrant economic outlook bodes well for today’s investors.
Analysts at S&P expect India to become the world’s third biggest economy by 2030, with nominal GDP tipped to nearly double to around $7trn in that time.
While it provides excellent growth potential, this regional fund also provides higher risk than more global-based ETFs. However, its diversification across multiple cyclical and non-cyclical sectors can still help investors to effectively spread the risk.
Among the fund’s 246 holdings are HDFC Bank, IT specialist Infosys and telecoms provider Bharti Airtel.
