Some of the best UK ETFs to buy this quarter include those centred-on investing themes such as gold, Brent Crude, and sustainable equity.
Buying shares in the best UK exchange-traded fund (ETFs) is one of the most popular investing strategies, especially amongst newer investors who value the diversification ETFs offer without the rigidity of a mutual fund.
Key benefits of the best UK ETFs include increased exposure to a diversified range of investments, the trading liquidity of equity, and the ability to manage risk by trading futures just like an individual stock.
IG has an excellent rundown of exactly what an ETF is, its advantages and disadvantages, and how to invest in them here. While there are hundreds of UK ETFs to buy, investing choices can be made easier using an ETF screener to select funds according to preferred metrics.
Given the inflationary environment, the following four UK ETFs could represent some of the best choices for Q3 2022. One key thing to note is that this list is only comprised of LSE-listed ETFs, which avoids the higher commission fees associated with those listed internationally.
4 best UK ETFs
One of the most popular ETFs in the UK, and often the first many invest in, is the iShares Core FTSE 100, which offers exposure to the 100 largest UK-listed companies by market cap. The fund attempts to exactly follow the performance of the FTSE 100 constituents, as allocated by FTSE Russell.
There are several advantages to this ETF. For example, it has exceptionally low fees, and offers globally diversified growth through large UK-based sector-leading companies such as AstraZeneca, Shell, and HSBC. The FTSE 100 has also outperformed its international peers in 2022. And requiring little management or research, iShares markets the ETF to be used ‘at the core of a portfolio to seek long-term growth.’
Its key disadvantage is that the FTSE 100’s largest companies are comprised predominantly of energy, mining, and bank stocks, with few notable exceptions. Explosive growth is unlikely, while the current favourable environment for these stocks is not guaranteed to last forever. In addition, it is more susceptible to localised disruptions within the UK, such as poor growth or political problems.
UK CPI inflation is currently at 9.4% and expected to exceed 11% by October. It’s a similar story in the Eurozone, the USA, and much of the developed world. Simultaneously, interest rates are rising; the Bank of England has raised the base rate to 1.25%, and a 50-basis point rise this month, in the words of Governor Andrew Bailey, is ‘on the table.’
In an era of rising inflation, gold remains the traditional real asset inflation-hedge, preserving purchasing power and acting as a protective asset in times of severe market stress. Of course, critics — most famously Warren Buffett —argue gold produces no income and therefore has no intrinsic value or growth.
However, looking at the growth stock heavy NASDAQ Composite's performance in 2022, this argument may not hold for many investors right now.
With physical gold usually outperforming gold miners, and the precious metal at a near record high, this ETF represents an excellent way to invest in gold without the liquidity difficulties associated with owning the physical asset.
3) WisdomTree Brent Crude Oil ETF (BRNT)
The WisdomTree Brent Crude Oil ETF is designed to closely track the Bloomberg Brent Crude subindex, collateralised by swaps held with the Bank of New York Mellon. Buying shares in this popular ETF gives investors exposure to Brent Crude, globally recognised as the most popular oil benchmark, which is based on oil drilled in the North Sea.
While oil prices are currently at high tide, it was only two years ago that Brent went negative for the first time as the pandemic-induced crash torpedoed global demand. With many smaller oil producers going out of business, 2022’s global economic resurgence has seen demand for oil from the remaining producers surge.
With reluctance from the OPEC+ cartel to increase output, and Russian oil effectively under embargo as a result of the Ukraine war, Brent is now trading for around $100/barrel, $30/barrel higher than its 2021 average, despite easing off.
While this ETF offers investors the opportunity to profit, especially if the oil price surges again, the risk of demand destruction also remains high, especially given global recessionary risk factors.
4) HSBC UK Sustainable Equity UCITS ETF
HSBC’s Sustainable Equity UCITS ETF aims to track as closely as possible the returns of the FTSE UK ESG Low Carbon Select Index, which seeks to achieve a reduction in carbon emissions and fossil fuel reserves exposure, and an improvement of the FTSE Russell ESG rating against that of the Parent Index.
The ETF achieves this goal by removing companies based on sustainability exclusionary criteria and by applying the United Nations Global Compact exclusionary criteria. One risk to consider is that the fund may invest up to 35% in securities from a single issuer during ‘exceptional market conditions.’
While better returns can be found elsewhere, many UK investors are now prioritising ESG and sustainability over profits as their primary focus. This ETF is one of the simplest ways to do this.
After the COP26 climate summit, and especially in the wake of rising oil and gas prices, the UK, Europe and USA now have political impetus to further develop green energy, including wind, solar and nuclear as a means of achieving greater energy security. While this ETF may see growth as a result, its key attractant is as a gateway into ESG investing.
* Commissions for ETF trades start from £3 for share dealing. Commissions are subject to change and may differ in regions outside the UK.
** Based on revenue excluding FX (published financial statements, June 2020).