Best ETFs to have in an ISA

After a rally in financial markets since the start of November, investors may be feeling a little more optimistic about their ISA choices for the year ahead. Interest rates appear to have peaked and may even fall by the end of the year. Inflation seems to be under control, and there are signs that any economic weakness will be mild and short-lived.

However, Peter Sleep, Senior Investment Manager at 7IM, cautions that ISA investors shouldn’t be reckless, even if the environment feels better. He says: “I feel quite strongly that money going into ISAs should be into relatively safe mainstream ETFs and not into chancy thematic ETFs which can go in and out of favour.”

That means no AI, innovative technology or clean energy-themed ETFs – not because these aren’t interesting areas, but simply because most mainstream ETFs will already have exposure to these trends and investors probably don’t need any more. There is always the temptation to chase big returns, but the volatility is likely to be uncomfortable for all but the most experienced investors.

Sleep says: “My picks for this year’s ISA season are pretty straightforward and all are easy to buy and sell should the need arise.”

iShares Core MSCI World UCITS ETF

For investors who are comfortable with a reasonable level of stock market volatility, he recommends the iShares Core MSCI World UCITS ETF. This invests in a huge range of almost 1,500 companies from around the world.

Sleep explains: “This costs 0.2% a year and holds about 1,500 of the world’s largest companies. That includes Microsoft and Apple in the US, Toyota in Japan and companies in Europe such as HSBC, Nestlé and Novo Nordisk.” Investors get plenty of diversification all in one place and at a low cost - ideal for the core of an ISA portfolio.

iShares Global Corporate Bond ETF

For investors who would rather avoid the volatility that comes with stock market investment, Sleep suggests a lower-risk ETF such as the iShares Global Corporate Bond ETF. This one directly invests in corporate bonds [issued by businesses] across a variety of different sectors, including industrials, utilities and financial firms.

He adds: “This holds about 13,000 different high grade corporate bonds from companies like brewer Anheuser-Busch, pharmacy CVS Health or Microsoft. The ETF is reasonably priced at 0.25%.”

Now that interest rates have risen, corporate bonds make an attractive investment opportunity. As bonds pay out interest, they can be a good cushion for those who want to invest but would prefer the predictability of receiving a fixed income from their investments.

Royal Mint Responsibly Sourced Gold ETC

Finally, Sleep’s last choice is the Royal Mint Responsibly Sourced Gold ETC. He says this could be a good option for investors who want something different but also want to hedge against inflation to protect the value of their money.

It works by tracking the price of physical gold and is designed to offer investors an effective way to access the gold market. The fund is Shariah compliant. It’s also the first financial product to be sponsored by The Royal Mint and the first gold ETC to be launched in partnership with a European Sovereign Mint. Another unique feature is that investors can actually redeem their shares for physical bars and coins.

Priced at just 0.25%, Sleep says: “This tracks the gold price, less fees, and in the long term is a good inflation hedge. Gold mining can take place in war zones and can be environmentally damaging. This ETF uses mainly scrap gold to minimise the impact of gold extraction.” It will suit investors who would rather their investments were kind to the environment as well as their pockets.

Royal Mint Responsibly Sourced Gold ETC was also an expert pick for the best ETFs to have in a Lifetime ISA.