Funds are an excellent way for investors to easily diversify their portfolio without having to hold individual stocks. They provide a ‘set it and forget’ investment strategy that allows you to grow your portfolio over a long period of time and ultimately achieve financial freedom.
Much has changed over the past year in the stock market, so let’s explore 5 of the top funds to invest in for 2022 and beyond. These are a mix of both passive and active funds that give you exposure to an individual index, global diversification and active strategies aimed at regular, growing dividend income.
Whether you are just getting started in your investment journey, looking to grow your portfolio through capital gain or looking to even retire and live off your dividend income, there is a fund on this list for you.
Vanguard FTSE UK Equity Income Index
The aim of the fund is to track the performance of the FTSE U.K Equity Income Index. In doing so, the fund provides an immense dividend yield. With a yield of 5.47% and steady, albeit modest capital growth, this fund is perfect for those looking for passive income. Dividends for this fund are paid out bi-annually.
With an expense ratio of 0.14%, like most Vanguard funds, the index tracker offers a cheap way of investing in dividend stocks for passive income for some of the best public UK companies. With over 100 individual holdings in the fund, it is well diversified, but not nearly as broad as some of the other funds on this list.
The top 10 holdings within the fund include the likes of GSK, Shell, National Grid, and more great dividend stocks. I have featured many of these names in my ‘Stock of the Week’ series on why I think they are great dividend investments.
From a sector exposure perspective, the fund invests heavily in banks and industrial metals & mining. These industries struggle in recessionary backdrops, which is something to consider if you believe the UK is heading into recession.
Fidelity World Index
The aim of the fund is to achieve long term capital growth by closely matching the performance of the MSCI World Index. As a global fund, it is incredibly diversified, with over 1500 individual holdings. Owning a piece of so many stocks across the world guarantees that you don’t miss out on the incredible rise of future leading companies.
While the index is dominated by American companies now with a 63% allocation to the US, it can shift greatly over time. Owning a global fund ensures your portfolio is not left behind by concentration. While the US stock market is the largest right now, it may not be forever.
As it’s not aimed to be an income fund, the dividend yield is lower at 1.35%. They are however paid out quarterly, giving a steadier stream of income than the Vanguard Equity fund.
The expense ratio is once again very low at just 0.12%. As both mentioned are index funds, their expense ratios are among the lowest available for investors, ensuring that you aren’t charged high management fees for investing in the fund. As a comparison, we will look at some actively managed funds to see how they compare.
The top 10 holdings are all the largest US companies by market cap. While this fund leans heavily into software and technology, investors do get exposure to other elements such as biotech, retailers, and non-renewable energy to name a few.
Artemis Income
Like the Vanguard fund mentioned earlier, this is also an income fund, with the aim of this fund to grow both income and capital over a five-year period. As such, the fund produces a healthy dividend of 3.65%, with those dividends paid out bi-annually.
As an active fund, it carries an expense ratio of 0.80%, much higher compared to the index funds. Remember, a higher expense ratio can be justified if the active fund outweighs the broader index. If the fund manager fails to outperform the benchmark over a long period of time, it may be best to just invest in a passive index fund and save on the excess management fees you would incur.
With only 47 holdings in the fund, it is much more concentrated that others on this list. Whenever a fund has more exposure to single stock names, it will react quicker to both positive and negative developments in those stocks.
The top 10 holdings are a mix of great dividend stocks across many industries, with the sector weighting in favour of media and investment banking & brokerage services.
Rathbone Global Opportunities
The aim of the fund is to deliver a greater total return than the Investment Association Global Sector, after fees, over any five-year period. Total return means the return we as investors receive from the value of our investments increasing, also known as capital growth, plus the income we receive from our investments in the form of dividend payments.
The dividend yield of 0.12% is much lower yield than the other income funds on this list, but the total return of this fund is impressive, with double-digit growth in 3 of the last 5 years. While this may not be the most suitable fund for income investors, it has potential to generate outsized total return over a long period. As an active fund, it also carries a higher expense ratio at 0.77%.
The top 10 holdings show that the fund is not heavily weighted towards any single stock, with the highest allocation at a mere 2.63% for Costco.
Like the Fidelity World Index, this is a global fund, but an active one rather than a passive index tracker. With a 64% weighting to the United States, it is still heavily concentrated. However, it gives us as investors exposure to different countries that we perhaps would not invest in individually, such as France, Switzerland, Netherlands, Spain and more.
Legal & General US Index
The aim of the fund is to provide growth by tracking the performance of the FTSE USA Index. This fund has 620 individual holdings within it, making it one of the most diversified funds available to investors. Not only this, but it has also generated a positive annual return every year in the past 5 years.
With a dividend yield of 0.90%, the yield is relatively low. This is mostly due to the heavy weighting towards technology, which provides capital growth over passive income in dividend payments.
With an expense ratio of 0.10%, this passive fund provides great returns at a low cost. Over the long term, it is very hard, almost impossible for active managers to outperform and index consistently. I have discussed why active managers tend to underperform the market over the long run here. Therefore, passive index funds are so popular among investors. They generate the best returns while being the cheapest option available!
