Sign-up to Freetrade via this link and we can both get a free share worth between £3 and £200.
Whether you’re one of the nearly 200,000 people who’ve signed up to Freetrade’s commission free trading app and are excited about the money making possibilities ahead – or you’re looking for an online trading alternative to Robin Hood after the US giant scrapped its UK launch plans – now is a good time to think about your Freetrade* investment strategy.
- One option is to dive in at the deep end, watch a lot of sketchy YouTube videos, and get burned punting stocks based on internet rumours and tips.
- An alternative is to follow the advice of one of the greatest investors of all time – Warren Buffett – and follow a passive investing strategy.
Passive investing works. It keeps your costs low, helps prevent you being wiped out by a bad run, and harnesses the best evidence for long-term success in the markets.
You can put together a passive investing strategy on Freetrade using its commission-free Exchange Traded Funds (ETFs).
ETFs are low-cost investment funds that enable you to quickly diversify across global markets, because each ETF can combine thousands of shares (or other assets) into a single vehicle.
By using ETFs as your building blocks, you can put together a strong, diversified portfolio with a handful of trades that’ll set you off on the right foot.
You just need to know where to start.
Freetrade ETF model portfolios, made by Monevator
Model portfolios offer a customisable framework that investors can use to sense-check their ideas.
Model portfolios can also be used off-the-shelf to get you going. You can refine your positions later, once you’ve had a chance to do more research.
The type of portfolio you build depends on your personal circumstances:
- Your financial objectives
- Your risk tolerance
- How critical your investments are to your financial future
- Your age and investing time horizon
The right approach for you depends on how those factors mesh with your financial situation. There is no universal answer. But different model portfolios enables us to illustrate useful rules-of-thumb.
The ETF components of each of the portfolios below are chosen from the Freetrade Investment Universe.
These ETFs are commission-free with Freetrade and traded on the London Stock Exchange.
Freetrade’s minimum trade value is £2. In reality, the minimum trade size when creating these model portfolios is likely to be determined by the ETF’s share price. This is because you can’t trade a fraction of an ETF share on most UK platforms, including Freetrade.
Freetrade’s ISA costs £36 a year, which is very reasonable. There’s no charge for holding your ETFs in a taxable1 account, but we’d urge you to open an ISA for the long-term benefits.
Here’s a couple of quick notes on the tables below to help you read them:
- Asset class – Assume the asset class is equities unless otherwise noted. For example, ‘Global’ means ‘Global equities’ unless we refer to specific asset classes such as bonds, property, or gold. The bold figure is the percentage of your portfolio’s value to be held in that asset class.
- ETF name – You can quickly identify each ETF by using its ticker – the four letter identifier in brackets.
- OCF – The Ongoing Charge Figure (OCF) is the main annual cost levied by the ETF’s provider for management services. The OCF is the simplest way to compare ETF costs. The OCF is expressed as a percentage of your holding, although there are other costs of ownership.
Let’s get on to the portfolios!
The KISS (Keep It Simple Stupid) portfolio
| Asset class | ETF name | OCF |
| 70% Global | Vanguard FTSE All World (VWRL) | 0.22% |
| 30% UK government bonds* | Vanguard UK Gilt (VGOV) | 0.07% |
*Alternatively: £-hedged global bonds = iShares Global Government Bond ETF (IGLH) OCF 0.25%.
Investing does not have to be complicated. Most investors eventually conclude that complexity only offers the illusion of sophistication and they’re actually better off keeping things straightforward.
This two ETF portfolio ensures that you’re diversified across the two main asset classes that will drive the bulk of your investing results. The global equities ETF offers maximum stock market diversification and growth potential in a single fund, while the gilt ETF is the most important defensive asset for UK investors.
A more cautious, older, or inexperienced investor could place more weight on bonds and less on equities.
The High Risk portfolio
| Asset class | ETF name | OCF |
| 50% Global | Vanguard FTSE Developed World (VEVE) | 0.12% |
| 15% Emerging markets | iShares Core MSCI Emerging Markets IMI (EMIM) | 0.18% |
| 15% World small cap | iShares MSCI World Small Cap (WLDS) | 0.35% |
| 20% Total global bonds | Vanguard Global Aggregate Bond (VAGP) | 0.1% |
Younger or more risk tolerant investors may wish to concentrate more of their portfolio in equity sub-asset classes like small cap and emerging markets that have historically outperformed the wider stock market at times. Your hope is you catch a big wave of out-performance. The trade-off is that risky sub-asset classes can trail the wider market for a decade or more, and expose you to bigger losses during downturns.
Similarly, the Global Aggregate Bond ETF is more aggressive than the gilt ETF.
VAGP includes corporate bonds, which can offer greater returns during growth periods but are also riskier.
All-Weather portfolio
| Asset class* | ETF name | OCF |
| 50% Global | Vanguard FTSE All World (VWRL) | 0.22% |
| 10% World** property | iShares Developed Markets Property Yield (IWDP) | 0.59% |
| 10% Gold | HANetf The Royal Mint Physical Gold ETC (RMAP) | 0.22% |
| 15% UK government bonds | Vanguard UK Gilt (VGOV) | 0.07% |
| 15% Inflation-resistant government bonds | iShares £ Index-Linked Gilts (INXG) | 0.1% |
* Gain extra protection against deflation and fair-to-middling inflation by allocating 10% of your portfolio to cash. Hold the cash in a bank account rather than on a trading platform.
**The term ‘World’ typically denotes developed world markets whereas ‘Global’ incorporates emerging markets, too.
The All-Weather concept diversifies your portfolio across every worthwhile main asset class. The idea is that you’ll always have at least one asset that performs in every economic environment short of the Apocalypse:
- Equities and property for growth.
- Government bonds (and cash) for recessions.
- Inflation-resistant bonds for high inflation conditions. (Note, that the index-linked gilt market is widely thought to be subject to structural distortion at present.)
- Gold for when nothing else works.
Middle-of-the-Road portfolio
| Asset class | ETF name | OCF |
| 50% Global | Vanguard FTSE All World (VWRL) | 0.22% |
| 10% UK* |
SPDR FTSE UK All Share (FTAL) |
0.2% |
| 40% UK government bonds |
Vanguard UK gilts (VGOV) |
0.07% |
*Alternatively: iShares Core FTSE 100 ETF (ISF) OCF 0.07% is less diversified than FTAL but considerably cheaper.
The 60:40 equities:bond portfolio is the happy medium of investing portfolios. Its tilt towards equities makes it pro-growth, but the significant slug in bonds provides welcome relief during stock market crashes when investors flee to safer assets.
Note, that a dedicated UK equities ETF isn’t necessary – nor necessarily best practice – but many investors feel more comfortable holding a generous allocation in their home market. VWRL also contains a small slice of UK plc.
The Withdrawal portfolio
| Asset class | ETF name | OCF |
| 35% Global | Vanguard FTSE All World (VWRL) | 0.22% |
| 15% UK |
SPDR FTSE UK All Share (FTAL) |
0.2% |
| 5% Global property | iShares Developed Markets Property Yield (IWDP) | 0.59% |
| 5% Gold | HANetf The Royal Mint Physical Gold ETC (RMAP) | 0.22% |
| 20% UK government bonds | Vanguard UK gilts (VGOV) | 0.07% |
| 20% Short-term UK government bonds and/or cash | iShares UK Gilts 0-5yr UCITS ETF (IGLS) | 0.07% |
Investing is much trickier for retirees who need their wealth to last them the rest of their days:
- Equity holdings are required for long-term growth but are typically pared back at the beginning of retirement to reduce early exposure to market crashes.
- Strong UK equity holdings can make sense for retirees to help manage currency risk.
- Short-term gilts or cash pay near-term expenses.
- Global index-linked bonds are a good defence against inflation but aren’t available through Freetrade.
Income portfolio
| Asset class | ETF name | OCF |
| 50% Global high yield* |
Vanguard FTSE All World High Dividend (VHYL) |
0.29% |
| 20% UK high yield |
SPDR S&P UK Dividend Aristocrats (UKDV) |
0.3% |
| 30% Total global bonds |
Vanguard Global Aggregate Bond (VAGP) |
0.1% |
*Alternatively: SPDR S&P Global Dividend Aristocrats ETF (GBDV) OCF 0.45%. GBDV has a higher dividend yield than VHYL but a worse total return over the lifetime of the two funds.
Income investing is a popular strategy for managing wealth. The idea is to live on your dividends and interest while leaving your principal untouched. Advocates of this strategy favour high-yielding stocks to amp up their income payouts. The equity ETFs in the table aim to aggregate firms with strong dividend track records.
Socially Responsible Investing (SRI)
Freetrade does not yet have extensive SRI/ESG (Environmental, Social, Governance) ETF options. You’re limited to replacing your global equities and UK equities ETFs with:
- MSCI World Socially Responsible ETF (UC44) OCF 0.22%
-
MSCI United Kingdom IMI Socially Responsible ETF (UKSR) OCF 0.28%
Investing for children
Newborns and very young children probably aren’t going to need the money anytime soon – even in an unforeseen emergency (it’s your job to deal with those).
They also aren’t prone to the performance pressure inherent in checking the stock market every five minutes on a trading app.
Therefore, the best bet for the kids is to go all out for growth – as long as you promise not to freak out when a stock market slump hits town. If you keep your head then it will probably have blown over by the time the kids tap into their portfolio. That means:
- 100% Vanguard FTSE All World (VWRL)
- Then start putting the brakes on by proportionally adding bonds 10 years before the money is needed.
Not worth it
There are large and well resourced marketing departments that earn their keep by pandering to investors eager to cash in on the latest trends: think funds dedicated to AI, cyber security, robotics, ageing populations, or the rise of China.
Typically this kind of diversification isn’t worthwhile – and at best a total crapshoot – because you know nothing that the rest of the world doesn’t already know.
The big money is big because it sees the trends before you can. They have swooped in and bid up the prices of the best firms long before Reddit got a sniff of it.
Still, if you must put 5% of your money into big tech then there’s an ETF for that:
- Invesco NASDAQ 100 ETF (EQQQ) OCF 0.3%
The reason you don’t have to worry about the smart money when you’re investing across the wider global market is because you’re not betting on the trend.
You’re creaming off the profits made by the entire market – the sum of human productivity.
FCA regulation
Freetrade is regulated by the UK’s Financial Conduct Authority. Here’s why that matters.
Investing essentials
There’s much more to learn about investing than we’ve been able to cover in this linkfest. Here’s some cornerstones to look up just as soon as you can:
- Useful investing basics.
- Comparing the past performance of one fund or stock versus another is irrelevant to your results.
- Asset allocation is as much art as science. Get the big picture right and don’t worry about the odd percentage point or two.
- Automate your investing.
- Drip-feed your money into the market.
- Use your tax shelters.
- Rebalance your holdings to control risk.
- Take less risk as you get older or have achieved your objectives. Don’t get greedy.
- To find out about other investing platforms.
- To find out about other cheap ETFs.
- To sign up to Freetrade.
Take it steady,
The Accumulator
*Sign-up to Freetrade via our link and we can both get a free share worth between £3 and £200. Monevator editor The Investor is a shareholder in Freetrade.
- Non-ISA. [↩]
This is spectacularly helpful and clear, thanks. Shame it wasn’t available at the start of my journey but delighted that I can point new investors towards it in future. Nice touch to highlight the benefit of a different withdrawal portfolio.
If Freetrade are reading, please add more SRI options!
The biggest issue and disappointment with Freetrade is their inability to provide gain/losses and dividend income statements. I had discussion with their support team numerous times and you have to do a lot of manual work to make sure your accounting is recorded. Not an issue with ISA of course but I am curious how someone can be regulated without adequate yearly statements?
Speaking of ESG/SRI, I’d love to see Freetrade add iShares MSCI World SRI UCITS ETF which is nicely global, has good ESG scores and is lowish cost at 0.2%. (It comes in two flavours: Euro accumulating https://www.ishares.com/uk/individual/en/products/290846/ishares-msci-world-sri-ucits-etf-eur-acc-fund and Dollar distributing https://www.ishares.com/uk/individual/en/products/291392/ishares-msci-world-sri-ucits-etf-fund )
Trading 212 let’s you buy fractional shares in ETF’s. No ISA fee.
In your High risk portfolio you have mixed FTSE Developed World (VEVE) with MSCI Emerging Markets IMI (EMIM) which, due to different indexes attitude, skews the portfolio towards the Korean (S) market.
A better fit would have been slightly more expensive :
VEVE & VFEM (0.12% & 0.22%) ftse index
or
HMWO & EMIM (0.15% & 0.18%) msci index
It’s a good article but I have two issues.
Why are EM equities held in these portfolios but never EM sovereign bonds? EM $ debt has produced better returns than EM equities with lower vol over the past two decades. Falls in sovereign risk premia lead falls in equity risk premia. Moreover, there is little evidence that you get compensated for taking the EM currency risk built into EM equities and it very correlated. You are buying twice the risk for no extra return. In any asset allocation analysis, EM $ sovereign debt or EM local sovereign debt (FX hedged) is usually the correct passive allocation with EM local debt (FX unhedged) or EM equity (unhedged) the active allocation.
I also don’t see why investing in a Nasdaq tracker (EQQQ) is not worthwhile? On a similar basis you coould argue investing in an S&P500 tracker is also not worthwhile since those 500 stocks have also been bid up by big money. Choosing indices is always very arbitrary. It’s not as though you are stock picking though.
have you heard anyone having an issue with the free share monevator link not working? have put in my email twice now and nothing!
Thanks so much for this! I did the free share thing and was just about to disappear down the rabbit hole of comparing the different brokers for ISAs – but I’ll start using FreeTrade “properly” now!
My freetrade experiment is a foray into stock picking.
I bought Gregg’s and Carnival as classic pandemic plays, Avast was the freebie and a little flutter on Tesla has turned out to be meteoric.
Thankyou for this. I’m puzzled though….
Why say the index linked guilt market is subject to structural distortion and then say global index linked bonds are good. Is this because the former is UK market only and the later is global. Both are index linked so I dont understand .
@ Dawn – the problem is that all the available UK gilt ETFs are massively skewed to long duration linkers. The issue is that – one day – your inflation protection could be overwhelmed by interest rate risk. With the right global linker funds (which also include a fair slug of linker gilts) you can choose a mid or short duration fund – lowering your interest rate risk. If you click through on the two links where I reference this, there are more detailed explanations. You lucky thing!
@ Gary Cooper – that’s a great point. I don’t think owning a bit extra in S. Korea would make much difference in the long term but still, great attention to detail.
@ Rhino – are you enjoying it?
@ Simon – how are you getting on with Trading 212?
@ ZX – re: EQQQ – the evidence I’ve read tells me that I don’t get rewarded in the long-term for sector diversification. Nor growth stocks. As a passive investor, I can get my tech exposure from a global fund rather than skew my portfolio because Facebook has been on a good run and so, well, that must continue indefinitely, eh?
I can completely understand someone doing it though which is why I mentioned the fund. But then why not the Robotics ETF and a Wind Energy ETF and a Global Water ETF? This can get messy when this isn’t somebody’s day job.
Re: Emerging Market Sovereign bonds – I’ve been meaning to ask you about this. Would you recommend they come out of the equity allocation rather than the traditional bond allocation?
Now you know I’m a passive investor and it’s my sworn duty to try and operate on the basis of the available evidence and data. And not to act on the basis of tips I pick up from randoms on the internet whom I’ve never met . I say this with my tongue lodged in my cheek, and obviously you’re no random.
What I’ve been meaning to ask you is can you point me towards some data, or something to read, or some way I can piece together the long-term evidence to satisfy my own curiosity, and for peace of mind? I mean as somebody operating as a DIY investor as opposed to a professional fund manager whose next conference call might tell him to ditch Emerging Market bonds?
Or you can just promise to tell me the moment I need to sell these things 😉
Actually, I’ve just done a quick chart of 4 Emerging Market Sovereign Bonds ETFs in business since 2011 vs 1 EM equity ETF using the longest term data I can access.
Two of the bond ETFs are killing the equity ETF. But the Equity ETF is nicely ahead of the trailing bond funds, one of which is an absolute dog.
I haven’t checked out any of the particulars and I don’t know what’s going on in the indexes and which of those are hedged, if any. Suspect none of them given they launched in 2011 but I need to dig into it.
Anyway, I’ve not seen anything quite like that and I’ll do some more research but I’ve only got 9 years of data unless you can point me in the right direction? Which index would you recommend? The variation in outcomes here is something else.
Smooth ride so far thanks for asking! Hold VWRL and VAGP with T212. Dividends paid ok. Haven’t tried withdrawing though. Started dipping my toe in at £100 a month as an alternative to my usual broker.
> Warren Buffet
common spelling trap
@The Rhino
> Tesla has turned out to be meteoric.
You remember which way meteors move?
Thanks for highlighting WLDS – I didn’t realise this was on Freetrade and had been looking for a global small cap ETF.
This is a nice complementary article to go along with one of my favourites, your Lazy Portfolios one from 2013.
For investing for children I’d argue VWRP compared with VWRL but of course freetrade is trading costs free so doesnt matter except you need to keep on top of when dividends are distributed, plus any dollar conversion that freetrade may make a tad on the exchange rate.
@TA. It’s odd but when I look for stuff (research, data) on bonds for retail investors there is just so little vs. what is available for equities. The only thing I could find that wasn’t just marketing spin for their own EM bond fund was this from Vanguard in 2017 https://personal.vanguard.com/pdf/ISGEMB.pdf. It’s reasonable, if lacking in detail.
Any EM exposure, whether bond or equities, comes out of the “risky” portion of your portfolio (which typically means equities). EM $ denominated sovereign bonds are credit spread duration risk on top of UST interest rate duration risk, so they can be seen to be somewhat like corporate bonds, but with a better risk-return profile.
EM local govt bonds are interest rate risk (if FX hedged). They are still a “risky asset” FX hedged but that argument is falling over time. The problem is you have the likes of Brazil and Turkey govt bonds in the index, which definately act like a risky asset, but also the likes of Poland or South Korea which act more like G10 govt bonds. So it’s becoming more of a blend. If the EM local govt fund is FX unhedged, it will act like a risky asset since EM FX will typically get caned in a global risk off.
Index-wise, JPM is totally dominant in the insto market with 90%+ market share. It’s the EMBIGD (EM Bond Index Global Diversified) for USD sovereign bonds and the GBI-EMGD (Government Bond Index – Emerging Market Global Diversified) for local govt bonds. Both are capped at 10% weighting for any single sovereign issuer which improves diversification. Trackers like iShares SEMB and SELM both follow these. Some retail ETFs seem to follow the Bloomberg Barclays indices (this tends to be cheaper).
You’ll struggle to get more than about 30 years of history for EM sovereign bond markets. Prior to that most EM debt was via bilateral loans rather than bonds. It wasn’t until the Brady plan was introduced in 1989, which restructured many Latam bilateral loans into “Brady bonds” that you saw EM $ bond markets really get going. The local govt bond markets really didn’t get liquid across many countries until the mid/late 90s. I know that some argue they have EM equity data back to 1926 (or something) but frankly it’s a bit of a nonsense and not comparable. The MSCI EM index starts in 1988 for a reason.
@Dawn The difference between the nominal yield on a fixed rate bond, and the equivalent duration index-linked bond, is called the “breakeven” rate. For example, as of writing, the yield on 30 year UK gilts is ~0.6% and the yield on the equivalent 30 year RPI-linked gilt is about negative 2.3%. This makes the breakeven rate on the index-linked gilt 2.9% – i.e. RPI inflation would have to run at an average of 2.9%/year over the next 30 years for you to be better off owning the index-linked gilt compared to the regular one.
As already mentioned the big problem is that with a 30 year duration bond (index-linked or not) is that you’re going to lose something like 30% of market value instantaneously if market interest rates rise 1%. This isn’t a problem if you’re a pension fund and plan to hold the bond until maturity, since you’ll always get the face/par value back after 30 years. If you’re a trader though, or an invester with a shorter time horizon, this could be devastating.
@ Beardy – Good spot on Buffett. Think I was hungry when I wrote that. Absolutely shameful on our part, though. I see my editor has stealthily corrected it. Shame he missed it before setting this thing live! He’s only read 10 biographies on the bloke and worships him like a god.
@ ZX – Excellent! Thank you for taking the time. I’ll read that paper and root around to see what else I can find. You’re too right about retail-friendly bond information. It’s almost as if they’re not thought to be exciting enough. That, or hardly anyone understands them.
@TA @ZXSpectrum48k
I have a modest allocation to EM debt (USD). I see it mainly as a diversifier to an equity-heavy portfolio, as it is only moderately correlated with DM equities and not hugely correlated with EM equities (correlations of 0.6 and 0.7 respectively according to the piece linked below, and I’ve seen lower figures given elsewhere). And it has a decent yield and a volatility which is typically less than equities, though significantly higher than DM debt. So it is a more attractive alternative to the likes of commodities and gold in my view. I hold it through Vanguard USD Emerging Markets Government Bond UCITS ETF Accumulating (VEMA).
TA, you might want to check this out, which I think gives a good overview (just ignore this active manager’s claims that, surprise surprise, active is better than passive for this asset class): https://www.schroders.com/en/sysglobalassets/digital/insights/2019/pdfs/thought-leadership/in-focus-the-case-for-a-core-allocation-to-emd/cs1526_sc_emd_thought_leadership-v6.pdf
@TA – I haven’t derived any enjoyment, but it has confirmed I have zero stock picking skill.
C-strong. Agreed, which is why I hold $Tips as the ytm is a ‘cheaper’ negative -0.9 per cent and the ishares duration is circa 9 years. I was also keen to hold $ to hedge against a structural belief that the pound could weaken relatively to the dollar given cv and Brexit – which is looking wrong today – pleasingly! I do feel like I should be holding a total govt bond fund increasingly too.
With regard to linkers, remember that not every form of bond duration is comparable. While duration is often considered a measure of risk, it’s just a sensitivity to yield changes. So for linkers, duration is ΔPrice/ΔRealYield while for fixed rate bonds duration is ΔPrice/ΔNominalYield. So the actual price risk ΔP = Duration x ΔYield. Duration tells you nothing about the magnitude of ΔYield, the yield volatility. Real yield volatility is normally less than nominal yield volatility (typically, over the long term, with caveats etc). So a linker with duration 20 is less volatile than a conventional bond with duration 20. Normally perhaps only 60% as volatile. So don’t be as scared of the linker duration.
Also note that one reason why index-linked Gilts seem expensive is that they are linked to a inflation metric, RPI, that overstates inflation by around 0.5-1%. A government consultation is ongoing over the issue but it seems the UKSA has been given permission by the Chancellor to align the RPI with the (lower) CPIH from 2030. Why 2030? Because ILGs issued pre-02 required the Chancellor to sign-off on changes in RPI that cause material detriment to bond holders, and the last of these bonds matures in Jul-30. This consultation could clear impact long-duration ILG returns.
The other reason ILGs seems expensive is the historical lack of supply. There are only £443bn ILGs in issue. Against that UK DB pension scheme liabilities, the majority of which are to some degree index-linked, are well over £2.3 trillion. The life insurance industry and DC pension providers would like some too.
Finally, the yield give-up from FX hedging something like US TIPs is cheap right now since the rate differential between the countries has collapsed to just 0.17%. That was almost 2%/annum just in late 18. Obviously, you are linking to the “wrong inflation” as a UK person but it’s an alternative to holding UK linkers and without taking the currency risk. Something like TIPH LN can be used for that.
Many thanks for explaining
I understand now.
I do have the royal london short duration global index linked fund in my armour.
Thanks for explaining.
Long term bonds ie (30 years) or linkers are way too sensitive to intrest rate risk ,i get that. .
I’m 55 dont have a long time horizon. Ready to live off my portfolio at any given moment.. My fixed intrest allocation is split between short term linkers and cash .
@ c-strong -is VEMA the same as VEMT do you know? The accumulation version maybe? I can find VEMT on the Vanguard Uk site and both on the Hargreaves Lansdown site but an explanation of the difference nowhere.
@Ruby You’re spot on – as far as I can see VEMT is the Dist version and VEMA is the Acc version of the same thing. They both track the Bloomberg Barclays EM USD Sovereign + Quasi-Sov index.
@ZXSpectrum48k
I guess the question is what will happen to e.g. GILI LN (UK linkers, long duration) vs TIPH LN (US linkers, short duration, hedged) if the base rate remains 0-0.75% for the next 10 years and inflation returns to 2%. Long duration ILGs seemed to ignore the base rate rises from 0.25% -> 0.5% -> 0.75% between 2015 and 2018 and just kept going up, which is interesting. GILI LN has performed 6%/yr over the last 3 compared to TIPHs 3.7% total return.
@ZXSpectrum48k
Do you think pension funds will keep buying ILGs as real (inflation adjusted yields) threaten to turn negative? With a nominal yield of -2.3% on the 30 year ILG and 30 year CPI inflation of 2.5%, why would they buy?
@notlostyet. From an accounting perspective, DB pension funds liabilities are valued off the Gilt curve and many of those liabilities are indexed to inflation. So they are natural buyers of ILGs since they act as a replicating hedge for their liabilities. In that sense a 100% portfolio of conventional Gilts and ILGs is a neutral or marketweight position.
DB pension funds collectively started the year about 70% hedged (so 30% underweight or effectively short) Gilts and UK investment grade bonds (both conventional and inflation-linked). Now that underweight is an overestimate since they use interest rate and inflation swaps also to hedge their liabilities. The problem is that the residual underweight was sitting in mainly commercial property and the FTSE (both down over 15% while long-duration Gilts are up about the same). So this year the “active allocation” part of their portfolio has probably cost them anything up to 30% on up to 30% of their portfolio. Ouch. Plus their liabilities will also have increased due to convexity effects. Double ouch. I suspect pension trustees are less than impressed and I think they might be strong buyers on any backup in yields.
These DB pension funds could have sorted their problems out two decades ago by just buying Gilts and then selling the ongoing management to L&G for 1bp/annum (Boots actually did this). Instead many prevaricated, arguing Gilt yields were to too low, that ILGs were expensive. More recently they even thought that a real yield of zero was a floor. Oops. Hence why the FTSE now includes many companies with small DB pension funds attached but also many large DB pension funds with small companies attached. Smaller because of the mismanagement of the DB pension fund!
Thanks all for the insightful comments around index linked gilts everyone – a more interesting comment thread! I continue to be happy holding US TIPS on the basis of currency exposure, a lower duration and a lower negative YTM than the UK Gilts equivalent. I’m ok being exposed to a different currency and a different inflation rate. I do think these or the UK equivalent should form part of peoples portfolios (or at least consideration) to hedge against unexpected inflation although they’ve never really been tested in that environment I acknowledge. Plus there is no sign of inflation on the horizon – that’s the point I suppose to have them.
C-Strong thanks for the link, which I read. I would be unconvinced about holding EM bonds as part of my ‘bond’ asset allocation. Although given I just hold global equities it’s displaying rather a decent amount of cognitive dissonance on my part not to just hold a global bond portfolio. My concern is that in an extreme environment and I find the conclusions of the black swan by taleb convincing, which would be somewhat critical of that article I think, I want to be holding US$ bonds, gold etc. Not emerging market bonds. Therefore I guess they can be part of your risky portfolio and yet with bonds your upside is kind of limited (I appreciate not in the short – medium term) where with equities it shouldn’t be. But again I also accept that conclusion has been wrong in the medium term past. I accept the answer is for a passive investor they should hold a global bond fund and some sterling cash reserves.
When will Freetrade offer a SIPP account. Currently only offering a general account and a ISA account. Assuming most people have prioritised pension savings/SIPP accounts, Freetrade are missing out on sizeable investment portfolios. Happy to invest in shares, investment trusts and etf’s and like their app.
No factor portfolio?
I have been thinking about an allocation to value (I already hold small caps and min vol). Value has had a very bad run, which happens occasionally, making valuations lower than average. A few global value ETFs now available at reasonable cost and now might be a good time to invest.
I have an ISA with Trading212 – no monthly fee + no trading fees – roughly
25% iShares MSCI World ESG Enhanced UCITS ETF EGMW 0.20% OCF
25% iShares Edge MSCI World Momentum Factor UCITS ETF IWFM 0.30% OCF
25% iShares Core UK Gilts UCITS ETF IGLT 0.07% OCF
25% iShares Physical Gold ETC SGLM 0.15% OCF
they have TIPS and index-linked gilt ETFs but I prefer to use a gold ETF for added diversification
Thanks for this article. I have been very much a VLS80 for the past 4 years. Going to try this out with a small amount each month – allows me to get as involved as my limited knowledge allows me!
Great site by the way – I am well on course to be comfortable in a few years time and I wouldn’t have been anywhere near that or have had that visibility without this site. Thank you.
Hi,
Great site, thank you to everyone who contributes. I’m a newbie to investing and looking to invest for 15+ years (for retirement). Unfortunately I keep going backwards and forwards on choosing VLS60 or HSBC global balanced portfolio or a simple 2 fund portfolio (global equity fund + either uk or global bond fund whichever makes sense regarding cost vs effectiveness). But prefer the split to be 70/30.
I’ve not previously looked at ETFs due to potential trading costs. However I’m in a dilemma:
a. Not sure about percentage levels in VLS not matching a true global tracker also would need something else if I wanted to adjust the bond element (like the idea of a 70/30 split). Does this really matter or am I reading too much into it?
b. HSBC global balanced portfolio seems to use percentages more in tune with a global tracker but not sure on what I read about their in-house tinkering with levels in the fund. Fund costs are less than VLS however cheapest platform cost would be Cavendish.
c. The more I read on the 2 fund/ETF portfolio the more it seems to make sense but the main issue is selecting the right funds/ETFs – HSBC all world tracker seems to fit (but think it avoids small cap) when going on Mr Kroijer’s recommendation for the broadest/cheapest global tracker but how good is it ? (Is paying extra for the vanguard all cap worth it?) also I come unstuck with the bond side. UK or global bond tracker??? The KISS ETF portfolio above would work for me if ETF costs don’t exceed those of a mutual funds portfolio.
d. Originally disregarded ETFs as being too expensive for me due to trading costs but now free trade & trading212 have been stated I’m not sure now. Trading 212 doesn’t seem to cost anything to set up, hold and trade a simple 2 ETF ISA portfolio, am I missing something???
So after going around the houses (sorry!), would it be folly for me to choose the KISS ETF portfolio above using something like Trading 212 (what’s their reputation like? Reviews seem mixed) or is it wiser / cheaper (for £150 pm regular investment) to buy two mutual funds (a global tracker + bond tracker) through someone like Cavendish. I want to avoid too much tinkering (a bi-annual rebalance of two funds/ETFs seems within my capabilities).
Any suggestions gratefully received.
I realise this article is now gently ageing but thought I’d post my recent experience with Freetrade. It seems they’re a victim of their own success. Emails take days to get automated replies. They’ve asked me three times to validate an account that they received the documents for on the day they were first requested. The in-app communication is simply a pointer to emailing them … which then doesn’t get a response. It’s a frustrating experience … and a million times worse than Vanguard I was dealing with at the same time.
Caveat emptor …
@David – I attempted to open a Freetrade SIPP account. Easily opened and monthly fee collected. Unable to initiate transfer in. Again experienced similar to your comments. Managed to have initial investment returned and monthly fee refunded after email correspondence. Account closed as onboarding experience turned me off of using them. Thankfully with Vanguard. Unfortunately Freetrade have issues to address.
@William @David — I had some trouble getting the transfer into a new Freetrade ISA sorted. Happily they were able to sort it out quite quickly for me. I suspect it’s a combination of absolutely incredible demand (at one point they were adding tens of thousands of accounts *per day* this year, and no start-up can be set-up to scale completely smoothly at that rate without soon going bust) and anti-money laundering issues.
The latter haunts all the Fintechs, who aim to do things quickly but are relentless targeted by criminals and fraudsters as a result. (This is what drives most of the bad reviews for neobanks, incidentally, too).
Once Freetrade account is working it’s a breeze. And it’s hard to stress what a joy it is to trade without fees! 🙂
I’m a shareholder so I’m biased, but I’d strongly suggest sticking with it and giving it a go before you give up, if possible. Tricky with annual allowances like an ISA I know.
@ The Investor
Decided to give Freetrade a second look re. opening of SIPP account with transfer in from existing SIPP provider. As of June 2021 it appears that Freetrade are managing on-boarding of clients without issue. Freetrade were responsive and helpful in a timely manner. Fixed SIPP fees the deciding factor as % fee of AUM no longer competitive. Plus investment offering aligns with my needs.
@ZXSpectrum48k – comment 23
Why is it that Real yield volatility is normally less than nominal yield volatility? Could you perhaps point to an article that explains this?