Investing in Exchange Traded Funds (ETFs) is an incredibly popular trading strategy, especially among newer investors. ETFs allow you to buy into a ‘basket of securities’ based on a specific sector or investing approach, without having to buy the assets individually.

Investing in an ETF allows for increased exposure to a diversified range of investments, the trading liquidity of equity instead of the rigidity of a mutual fund, and the ability to manage risk by trading futures just like an individual stock.

Of course, ETFs can contain all sorts of investments, from stocks to commodities to bonds. Other than the convenience, ETFs usually offer low expense ratios and lower broker commissions than buying the constituent assets individually. Naturally, there are many actively managed ETFs which are more expensive, but none make this short rundown for Q4.

With inflation still raging, a potential recession inbound, and uncertainty soaring, the diversification of ETFs appears more attractive than ever.

However, it’s worth noting that an ETF will only ever perform as well as its underlying constituents. For the uninitiated, we offer an ETF screener that can help to inform your investing decisions.

Best UK ETFs to watch

1. iShares S&P 500 Information Technology Sector ETF

For those looking for a chance of strong capital growth but with a little risk, the iShares S&P 500 Information Technology Sector UCITS ETF could represent a decent choice.

The ETF seeks to track the performance of an index composed of U.S. Information Technology Sector companies as defined by the Global Industry Classification Standard. It boasts diversified exposure to titanic US tech stocks including top holdings Apple, Microsoft, and NVIDIA, while also highlighting its single country exposure.

US information technology stocks suffered from tightening monetary policy in 2022, but a combination of AI-derived enthusiasm due to the success of ChatGPT and evidence that US inflation has now peaked, have helped to spur the larger tech stocks back to former heights. For context, Apple recently soared above a $3 trillion market cap, more than every London-listed company combined.

Further, this ETF might represent a decent choice to pair with the below FTSE dividend-tracking ETF; with the former outperforming during boom times and the latter acting as a hedge against inflationary periods.

2. iShares UK Dividend UCITS ETF

The iShares UK Dividend UCITS ETF is a selective ETF which focuses on the most appealing strength of the some of the best FTSE 100 companies — reliable dividend returns.

Instead of investing in all 100 companies in the UK’s premier index, it instead offers diversified exposure to the top 50 UK companies within the FTSE 350 with the highest dividend yield (excluding investment trusts). This approach is becoming more popular in 2023 — a FTSE 100 index tracker has returned -3.6% year-to-date, compared to a positive 15% return on the S&P 500.

British American Tobacco, Rio Tinto, Imperial Brands, and HSBC are its top four holdings, alongside other miners, banks, and several defensive stocks with a reliable history of dividend pay-outs. Of course, there are risks — dividends are not guaranteed and cyclical companies like Rio Tinto or Persimmon can see dividend yield fall fast in poor years.

Many investors look to pair this fund with a NASDAQ 100 index tracker ETF, allowing for some exposure to growth for a balanced portfolio.

3. Invesco Physical Gold ETC

Invesco Physical Gold ETC seeks to replicate the performance of the London Gold Market Fixing Ltd PM Fix Price/USD, with the fund backed one-to-one with gold bullion held by JP Morgan Chase in London bank vaults.

Gold currently trades for a near-record $1,926/oz, as the traditional real asset inflation-hedge, which preserves purchasing power and acts as a protective asset in times of severe market stress once again performs admirably in this inflationary environment.

It’s worth noting that during the 2008 financial crisis, the S&P 500 fell by 37% while gold rose by 24%. And this particular financial crunch currently looks far from over — with central banks buying a record 1,136 tons of the precious metal in 2022 and continuing to buy huge amounts this year.

Of course, gold’s price trades in an unofficial pair with the US Dollar; usually, rate rises tend to see gold fall as defensive investors seek the safe haven of the world’s reserve currency. However, gold has continued to rise even as monetary policy has tightened, and with some expecting that the US Federal Reserve will soon pause or pivot, gold could go on to new highs.

It is worth noting that equities have historically outperformed gold over the long term, as investors tend to reallocate their portfolios towards stocks when growth returns.

4. iShares Core UK Gilts UCITS ETF

The iShares Core UK Gilts UCITS ETF may be becoming a more popular ETF choice. Gilts are often seen as a complex investment but are not particularly hard to understand.

When the UK government wants to raise money to pay for its spending, it issues bonds known as gilts. The term can range from a few months to decades; investors receive an interest payment (coupon) during the bond’s life and get their capital back on maturation.

The price of an individual bond can fluctuate, but gilts are considered practically risk-free for long-term investors who plan to hold their bonds to maturation, as the UK government guarantees repayments.

UK bonds suffered heavily during 2022 from the twin dangers of rising inflation and interest rates. However, potentially slowing rate hikes could see bond markets improve, and recessionary fears mean some investors are prepared to buy UK gilts to offset higher risk equities.

This circa £1.8 billion ETF makes investing the in UK gilt market very simple; with a total expense of ratio of 0.07%, it is low-cost and also very liquid.