Exchange-traded funds (ETFs) are a rapidly growing asset class the world over. They allow individuals to target market-beating returns while, at the same time, helping them to manage risk by spreading their capital across a basket of assets.
Investors can choose from thousands of funds that match their investment goals and tolerance of risk. I myself own several in my Self-Invested Personal Pension (SIPP). And I’m looking for more that could deliver strong capital gains and a reliable dividend income I can reinvest for growth.
Here are two on my radar today. If they continue to deliver the returns of the last five years, they’ll turn a £500 monthly investment into an impressive £1.2m over the next 25 years.
Digging for huge returns
Mining is notoriously unpreditable and fraught with risk for companies. Exploration disappointments, project delays, and production outages can play havoc with profits forecasts and decimate share prices.
ETFs that invest in a basket of minerals producers don’t completely eliminate this threat. Operational problems at one major holding can substantially impact overall returns. But on balance, I think funds are far less risky than purchasing individual mining stocks.
I’m looking for a low-risk way to capitalise on a likely rise in copper prices over the next decade. And so I’m thinking of adding the Global X Copper Miners ETF (LSE:COPX) to my SIPP.
As the chart shows, the copper market faces substantial shortfalls in the coming years, which I believe could drive up prices:
In total, the fund holds shares in 40 red metal producers including First Quantum Minerals, Lundin Mining, and UK-listed share Antofagasta. Owning a fund that owns copper stocks instead of a fund that tracks metal prices can be more lucrative in bull markets — because copper miners have fixed costs, their profits grow faster than metal prices, delivering superior capital gains for investors.
This leverage effect means that, since August 2020, this Global X copper fund has delivered a healthy average annual return of 10%.
Emerging market opportunity
As well as boosting my copper market exposure, I’m looking to improve my exposure to emerging markets. For this reason, the Franklin FTSE India UCITS ETF (LSE:FLXI) is on my list of possible funds to buy.
India is the world’s fastest growing economy — the International Monetary Fund is tipping GDP growth of 6.5% in the next two years. And it has significant scope for breakneck long-term growth, driven by its booming population, robust private investment, and rapidly rising personal wealth levels.
These phenomena have already driven an average annual return of 17.1% for the Franklin FTSE India fund over the last five years.
I like this ETF because of its excellent diversification. In total, it holds shares in 263 companies, from HDFC Bank and Bharti Airtel to Tata Motors and Sun Pharmaceutical. This helps reduce risk and provide exposure to a wide range of growth and income opportunities.
Future performance could be impacted by US trade tariffs and reciprocal action from India’s government. But on balance, I think it’s another top fund for me to consider.
