Here are three top funds I’ll buy for my ISA when I next have spare cash to invest.

Value

Full disclosure. I opened a position in my first fund, the Xtrackers MSCI World Value ETF (LSE:XDEV), over the summer. I’m looking to increase my stake even further.

The fund’s delivered an average yearly return of 6% since it began a decade ago. This is a decent figure, although I think it could deliver a better return looking ahead given that demand for value stocks is gaining momentum.

In total, Xtrackers ETF is invested in 400 large- and mid-cap companies based on a variety of classic value metrics. These include forward price-to-earnings (P/E) and price-to-book (P/B) ratios. Major holdings here include tech shares Cisco, IBM and Intel.

Around 40% of the fund’s tied up in US equities, which leaves it vulnerable to a potential Stateside recession. But exposure to other territories like Japan and the UK helps to reduce this danger.

Growth

Since its creation in 2010, the iShares NASDAQ 100 ETF (LSE:CNDX) has produced a tasty 18.5% average annual return. That’s better than what the S&P 500 and FTSE 100 have both delivered in that time.

The fund’s star performance reflects its high exposure to fast-growth tech shares. Computer hardware and software, telecommunications, and e-commerce shares have risen sharply in value as our lives have been increasingly digitalised.

There seems to be a lot more scope for growth too, thanks to phenomena like artificial intelligence (AI), autonomous driving and quantum computing. This iShares fund has holdings in major players in these fields including Apple, Nvidia and Microsoft.

I am concerned about ETF’s high valuation however. A meaty P/E ratio of 37.8 times leaves it vulnerable to a price correction if market confidence sours. That said, I still believe the potential long-term benefits still makes it worth a very close look.

Dividends

The SPDR S&P Euro Dividend Aristocrats ETF‘s (LSE:EUDV) designed for those seeking reliable and growing dividends over time. And today, its dividend yield’s 3.5%, which is broadly in line with the FTSE 100 average.

This fund focuses on high-yield European companies that’ve raised or held payouts for 10 successive years or more. Through a combination of steady passive income and share price gains, it’s delivered a solid average annual return of 8.1% since its inception in 2012.

In total, this SPDR fund holds 39 different stocks, of which its largest holdings are financial services providers Ageas, Generali and Allianz. However, a large exposure to defensive industries like utilities and consumer staples helps it deliver decent returns even during economic downturns.

I think it’s a great fund to consider, even if its denomination in euros leaves my returns vulnerable to exchange rate movements versus the pound.

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Years of underperformance mean many stocks across the London Stock Exchange continue to offer juicy dividend yields. While we need to guard against potential investor traps, many of these shares look in good shape to pay large (and even growing) dividends over time.

One of my favourites can be seen in the table below. I’ve also included a high-yielding exchange-traded fund (ETF) that I’d like to buy to boost my passive income.

Both of these assets offers a yield far above the FTSE 100 forward average of 3.5%. If broker forecasts are accurate, a £16,000 lump sum invested equally across them would provide me with a second income of just over £1,000 this year alone.

Here’s why I’d buy them if I had spare cash to invest today.

Alternative Income REIT

Real estate investment trusts (REITs) can be ideal for a regular source of income. For starters, they’re property stocks, meaning they enjoy a steady flow of income through their rent collections.

Alternative Income REIT has its tenants locked down on long contracts too, providing it with added long-term stability. As of June, its weighted average unexpired lease term (or WAULT) stood at a hefty 16.4 years, to the earlier of break and expiry.

On top of this, REITs must pay out a minimum of 90% of profits from their rental operations in the form of dividends. This is in exchange for certain tax advantages (like not having to pay corporation tax).

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

On the downside, property companies can struggle to collect rents when times get tough. But of late, this particular REIT hasn’t had any problems on this front.

Collection remains strong thanks to its exposure to cyclical and non-cyclical sectors, and robust customer base (which includes FTSE 100 companies Whitbread and B&M). Indeed, the trust collected 100% of rents it was owed during the year to June.

SPDR S&P Euro Dividend Aristocrats UCITS ETF

By comparison, dividends at the SPDR S&P Euro Dividend Aristocrats UCITS ETF are more sensitive to broader economic conditions.

This fund provides exposure to 40 European heavyweight stocks. These include chemicals giant Solvay, financial services provider Generali and courier DHL. The trouble is a large number of its holdings operate in cyclical industries.

That’s not to say the companies it’s invested in have flaky dividend records. Far from it, in fact. As its name implies, it invests in Dividend Aristocrats, more specifically companies that have raised or held payouts for at least 10 consecutive years. This provides it with more solidity than many other income-focused funds.

This fund has delivered a decent average annualised return of 7.95% over the past decade. I think it could be a strong stock for investors building a dividend portfolio to consider buying.

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Unlike most traditional ETFs, which are typically passive funds that follow popular stock market indexes such as the FTSE 100 and the S&P 500, smart-beta ETFs follow a different kind of index, in which stock weights are not purely dependent on market capitalisation. Instead, stock weights depend on other factors, such as volatility, momentum, value or dividend history. And as such, smart beta ETFs target shares with characteristics shown to beat the market in the long term.

Minimum volatility

In the low volatility space, there’s the iShares Edge MSCI World Minimum Volatility UCITS ETF (LSE: MVOL). The fund aims to provide investors diversified exposure to developed companies, while seeking to minimise the market’s ups and downs.

It tracks the performance of a selected portfolio of shares, which on aggregate, has lower volatility characteristics relative to broader equity indexes. It’s clear that the intention is to create a less risky portfolio of shares, but there are also downsides to consider.

Firstly, its performance over the past three years has been less stellar than the standard MSCI World Index, with a total return of 31%, compared to the benchmark’s gain of 53%. Additionally, fees may be somewhat more expensive than the cheapest ETFs on the market today, as the iShares’ smart beta fund has a total expense ratio (TER) of 0.3%.

Dividends

For income investors, the SPDR S&P Euro Dividend Aristocrats UCITS ETF (LSE: EUDV) may be a better pick. The fund invests in the 40 highest yielding eurozone companies within the S&P Europe Broad Market Index that have either increased or maintained annual dividends for at least 10 consecutive years.

Shares in the ETF are sterling-denominated, making it simpler and potentially cheaper for most UK investors. But despite being sterling-denominated, investors are still exposed to currency risks — as the fund’s stock holdings are euro-denominated, your returns may fall or rise as the pound strengthens or weakens against the euro.

As of 31 July, France is its largest geographical exposure, representing nearly 30% of total assets, and this is followed by Germany (22.8%), Italy (12.5%) and the Netherlands (11.2%). The weighted-average dividend yield for its portfolio is 3.65% and the fund’s TER is 0.35%.

Value

Finally, the Vanguard Global Value Factor UCITS ETF (LSE: VVAL) is one of my favourites among value-focused funds. It uses a rules-based active approach that favours stocks which trade at low multiples on book value, past earnings, estimated future earnings and operating cash flow. It’s a relatively new fund, launched only in December 2015, but has so far performed well.

Since its inception less than two years ago, the ETF has delivered a total return of 52%, which significantly exceeds its benchmark FTSE Developed All Cap Index’s performance of 36% over the same period. Looking ahead however, future outperformance can’t be assured. Past performance may not be a good indicator for future results, and there are concerns that performance chasers are pushing prices to unsustainable levels.

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