What ETFs would I choose for a 'hands-off' Junior ISA?

Recently, a friend asked me about how to open a Junior ISA for their child and what stocks they should buy within their ISA (max. deposit £9k per child per year). When their child reaches 18, they hopefully would have a nice fund on which they can draw on for college or a car or whatever. Another objective however, was to hopefully interest the child in the power of investing in the stock market (and the earlier they start, the better!).

If you have child or grandchildren, you should get them started with a Junior ISA as soon as they can read and have pocket money. Two parents + four grandparents can contribute on birthdays and Xmas each year. Over the years, the kids can decide what satellite ETFs they want to invest in (keep the core as a world global ETF) and they will come to appreciate the effect of compound interest (which Einstein described as the 'eighth wonder of the world').

I wanted a minimum maintenance/set-and-forget portfolio (at least to start with). This led me to think about a world ETF as a core and perhaps one or two satellite ETFs. They would have to be accumulating ETFs based in Ireland for low tax and have a low TER since they will be running for 15 years or so. It would also be nice to have some weighting for UK\EU to allow for Fx rate fluctuations.

The chart below shows SWDA as the core ETF (though I would actually buy the equivalent but cheaper ETF HMWS) and a few of my favourite high-return index ETFs as satellite holdings.

Because the future of the USA is uncertain in my opinion (in terms of political stability, lack of regulation, rife corruption, poor Fx rate for UK and inflation), for a long term portfolio I want to avoid a pure USA ETF like EQQB (NASDAQ) or the high-performer Tech USA S&P 500 ETF IITU.

So I suggest a mix of:

• HMWS\SWDA    Core World MSCI (25% will be in the top USA Magnificent 7 stocks, 70% in USA) OR VALL Vanguard FTSE Global All Cap OR WEBN for over 3000 world holdings
• IWFV    Edge MSCI World Value Factor (avoids Mag 7 - invest in value rather than hype)
• BNKE   Euro Stoxx Banks (avoids heavy USA weighting and $USD Fx - banks know money!)

P.S. Since writing this article, Vanguard have introduced a new Global ETF VALL which has over 10,000 holdings but is much cheaper with a TER charge of just 0.07%. I therefore recommend replacing HMWS with VALL in the JISA if you want less volatility but also slightly lower growth. There is a distributing version of VALL with a ticker VACD which would be a good pick for a GIA invest account core holding.

IWFV Sectors. 43% USA, 23% Japan.

Some people may argue that this portfolio favours larger companies and is not diversified enough across smaller companies or emerging markets. It is a valid point and I could include these but it would bring down the overall performance for the sake of lower volatility. Since the ISA cannot be cashed out for 15 years, I am not too concerned about volatility and the portfolio can always be revised at any time (say after 10-13 years) with no capital gains concerns.

As for the mix, I would suggest 60% HMWS/VALL, 20% IWFV and 20% BNKE if you are cautious, or equal weight if not (my preference as it is to hold long term anyway).

I would encourage the parents to 'dollar cost average' (add more throughout the year) into the ISA (perhaps on birthdays and Xmas if not monthly) and buy more of whichever of these three ETFs seem to be good value (i.e. price has gone down) or is expected to perform well in the next year. If they are not sure, then just buy all three in the same ratios.

ChatGPT says this 60/20/20 ratio should return 15% to 18% per year (based on last 5 years which includes the bad year of 2022). 

An equal weighting of HMWS (or SWDA)+IWFV+BNKE has returned an annual average of over 30%+ across 1, 3 and 5 years and 22% over 10 years.

Equal-weighting 40% annual growth in last 3 years!

Let us assume that we add £1000 every year for 15 years from age 3 and a 15% annual gain - we get...

£61,000 tax free by the time the child is 18. Due to inflation however, £61k will probably be worth 40k in today's value, but hopefully it's still enough for college!

So if the parents save just £20 a week (£1k/yr or £80/month) and keep adding that into the JISA, it could be enough for their kid's higher education (or a car) by the time they leave the nest!

Note: If adding a lump sum each year, I would suggest looking at the trending prices of all three ETFs first - if BNKE is trending down, then invest half and then wait a while, if HMWS/VALL is trending upwards having just dipped, then add it all in. Overall, try not to leave it sitting in cash in the JISA for longer than three months because you need to be in the market (unless there is a recession). The best time to buy shares is when they are cheap (e.g. after a correction) - think of it as a bargain!

My choice

I would consider also adding new ETFs, perhaps IITU or EQQQ or EQQU or EQQB. 25% each of HMWS+BNKE+IFWV+IITU (world+EU finance+world value+US tech) and it means I can easily compare their performance every year. This is very top-weighting US Tech however which is already contained in HMWS and IFWV so probably best to buy IITU on a dip rather than just now.

If however, you just want a simple, single, safe ETF, then VALL or HMWS would be the choice but the three or four ETF mixes suggested above should perform significantly better as we really don't care if we have a lot of volatility.

When the child approaches their 16th birthday (the JISA cash will become accessible in 2 years), the parents should review the holdings, if the future looks volatile then perhaps sell them and buy 100% VALL or HMWS and when the child is 17, decide whether to sell all ETFs and invest all in CSH2 which pays a risk-free daily interest rate and thus should not lose value in the last year before withdrawal even if there is a market crash.