Best ETFs to have in a pension

A new tax year is starting from 6th April, so with the annual £60,000 pension contribution allowance about to reset, now is perhaps the best time to review what your SIPP is invested in and decide if you’d like to make any changes. It’s spring cleaning season, after all!

One often overlooked addition to a SIPP portfolio is the Exchange Traded Fund or ETF. These can be a good option for long-term retirement savings – they tend to be lower cost and give you access to dozens, if not hundreds, of shares all in a single product. However, most ETFs replicate stock market indices, and that can create unintended consequences. In the US, for example, it could mean you end up over-concentrated in a handful of high-octane technology stocks that dominate the US market.

With this in mind, we asked expert Dzmitry Lipski, Head of Funds Research at interactive investor, to tell us which ETF he thinks are really the best for a SIPP portfolio and why. Scroll down to see his top three picks.

Invesco S&P 500 Equal Weight ETF

The S&P 500 - one of the US’s largest stock exchanges - is currently dominated by the so-called ‘Magnificent Seven’ technology companies: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Together they make up almost 30% of the index and contributed to over 80% of its performance this year.

Whilst this might sound like a promising investment opportunity, this over-concentration of tech stocks leaves the S&P 500 potentially vulnerable should anything upset the technology sector. Our Founder & CEO Holly Mackay explained a bit more about her thoughts on the issue in a recent blog post.

Bearing this in mind, Lipski picks the Invesco S&P 500 Equal Weight ETF as a good choice for a SIPP to get exposure to the top US tech stocks without over-concentrating in them.

“This is a good alternative to high-fee active funds that can struggle to outperform the US market, which is regarded as the toughest market for fund managers to gain an edge,” explains Lipski. “This exchange-traded fund (ETF) provides equally weighted exposure to US blue-chip stocks [large, established companies] that make up the S&P 500 index. Every stock in the index is weighted at 0.2%, regardless of how large or small the company is.”

“The fund reflects the US large-cap equity [stock] market while taking a size-neutral approach and covers approximately 80% of the available market. The fund’s equal weight approach offers greater exposure to smaller stocks and those with lower valuations, and thus provides a more diversified approach to investing in US stocks - which could lead to potentially higher returns.”

In other words, the equal-weighted nature of this ETF means you spread your investments across all 500 of the S&P 500 constituents equally, without preferences over reputation, size, sector or otherwise. Lipski says it’s a good option for exposure to US blue-chip stocks, “enhancing diversification and reducing concentration on a single stock or sector level”.

iShares Physical Gold ETC

Alternatively, for investors feeling nervous about where markets are heading at the moment, Lipski suggests the iShares Physical Gold ETC. An ETC is a type of ETF which invests in a commodity – in this case, gold.

In the past, gold has performed well relative to shares and other riskier assets during periods of extreme economic turbulence, market volatility and high inflation. This makes it an attractive investment when stock markets are looking ropey or a recession is on the cards, for example.

Lipski adds: “Over the longer term, the outlook is positive for gold as the Federal Reserve is expected to start cutting rates sometime in the second or third quarter of this year. The US dollar could weaken and this can play into the historic role of gold as a store of value during economic crisis.”

“It’s generally accepted that gold can also be used as an inflation hedge, during periods of rising inflation. That's because gold is priced in US dollars, so when each dollar becomes less valuable, it takes more of them to buy the same amount of gold. Conversely, low inflation and a strengthening US dollar can be seen as negative for gold prices.”

iShares Global Clean Energy ETF

Lipski’s final pick is the iShares Global Clean Energy ETF. Dating back to 2007, this ETF is also managed by the experts at BlackRock and invests solely in companies “involved in clean energy production or the provision of clean energy equipment & technology” in various regions around the world. 

“The war in Ukraine and resultant energy crises have shifted climate change from the investment agenda in the short-term,” Lipski explains. “However, the long-term impact of this war could lead to an acceleration in the transition from fossil fuels and increased demand for renewable energy. This iShares ETF tracks the performance of the S&P Global Clean Energy Index of companies, focusing on global clean energy-related businesses from both developed and emerging markets.”

The ETF gives broad, diversified exposure to the clean energy theme with a focus on the “medium- to long-term view” - in other words, it’s suited to investors who don’t mind tucking their money away for longer periods of time to allow their money to accumulate. And of course, those who want to back the transition towards clean energy may similarly find it reflects their personal values.