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Exchange-traded funds (ETFs) can help investors in UK shares balance their portfolios in an easy and low-cost way.
By investing in dozens, hundreds, or even thousands of stocks, these financial vehicles help individuals reduce risk and gain exposure to myriad market opportunities. That can be a great package in exchange for what is usually a modest annual management fee.
What’s more, UK investors don’t have to pay Stamp Duty when investing in an ETF. This tax is applicable to all UK shares that aren’t listed on Britain’s Alternative Investment Market (AIM) index.
Breakneck market growth means British share investors have hundreds of such funds to choose from today. Here are three I think could help investors build a balanced portfolio of growth, dividend, and value stocks.
Growth
Purchasing growth shares can deliver substantial capital appreciation over the long term. This is because companies that deliver above-average earnings growth also tend to enjoy spectacular share price growth.
The iShares FTSE 250 ETF (LSE:MIDD) is one fund growth investors may wish to consider. As its name and ticker imply, it’s focused on tracking the performance of the FTSE 250 index of UK shares.
The reasoning is that mid-cap shares like the ones this ETF holds have greater growth prospects than mature blue-chip shares, and thus the potential to rise more sharply in value. Names here include defence business Babcock International, emerging markets bank Lion Finance, and tech-focused fund the Allianz Technology Trust.
While it’s popular for its growth potential, this fund is no slouch when it comes to dividends either. Its 12-month trailing dividend yield is a healthy 3.1%.
Be mindful, however, that growth-focused funds like this could underperform during economic downturns.
Value
Like growth stocks, value shares are also popular because of their long-term price potential. The theory is that cheap high-quality companies can appreciate sharply in value as the market eventually recognises their worth.
To this end, the Xtrackers MSCI World Value ETF searches for marked-down shares based on formulae including price-to-book (P/B), forward price-to-earnings (P/E), and enterprise value-to-cash flow from operations (EV/CFO).
I like this ETF because of its wide geographical diversification. UK shares account for 9.2% of the fund, with companies in the US, Japan, and a large selection of European countries contributing to a well-balanced portfolio across developed markets.
Major holdings here include US tech shares Cisco, IBM, and Intel. I think it’s worth checking out despite the threat that Chinese technology shares could pose in the future.
Dividends
For dividends, I think investors should consider the Invesco US High Yield Fallen Angels ETF. Funds like these can help investors enjoy a return even during stock market downturns, through passive income.
This fund has a long history of offering market-mashing dividend yields. This is thanks to its focus on holding below-investment-grade bonds from businesses including Paramount Global, Kohl’s, and CVS Health.
Today the fund’s forward dividend yield is a large 6.9%.
The debt securities it invests in carry a higher risk of default. However, the fund aims to reduce this risk on overall returns with a large range of holdings (85 in total).
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