Exchange-traded funds (ETFs) offer the chance to invest in large groups (often hundreds) of shares in one fell swoop. The benefit of doing this is that I can instantly diversify my Stocks and Shares ISA then sit back and let compounding do its thing over time.
Here, I’m going to look at two ETFs that I’d buy today to fire up an ISA.
Global clean energy
When I imagine which types of companies might become very large in future, I keep returning to the theme of carbon reduction. That’s because the energy transition is a multi-decade process that will need vast amounts of investment and the brightest minds to get right.
Which brings me on to iShares Global Clean Energy UCITS ETF (LSE: INRG). This fund tracks the S&P Global Clean Energy index, which consists of about 100 listed companies involved in clean energy production.
The holdings include First Solar and Vestas Wind Systems, the world’s leading wind turbine manufacturer. It also holds Orsted, which recently unveiled its first solar project in the UK.
Now, clean energy projects tend to be highly sensitive to interest rates because building the infrastructure requires lots of capital up front. So, as rates have risen sharply, the renewable energy sector has encountered headwinds. These could persist for a while.
This is reflected in the share price, which has fallen 34% over the past year. However, zooming out over five years, the performance has been much better, with the shares rising 84%.
I think this dip could represent a good time to invest, especially as interest rates may soon peak. So I intend to open a position myself soon.
UK smaller companies
Next, I’d invest in the iShares UK Small Cap UCITS ETF (LSE: CUKS). This gives investors exposure to 255 UK stocks, with a particular focus on smaller-sized companies. These range from Centrica and Games Workshop at the top end to Moonpig and Judges Scientific at the other.
The UK smaller companies category has fallen massively out of favour this year and is one of the worst-performing globally. Rising rates to tackle stubbornly high inflation have fuelled the threat of a recession, and that risk remains.
Consequently, the fund’s share price has fallen 22% over the last two years (though it’s only down 8% over five years).
Nevertheless, I think there are reasons to be optimistic this performance can improve.
First, as mentioned already, interest rates may be about to peak as inflation cools. This should improve investor sentiment around UK-focused firms.
Plus, it should be remembered that the UK economy has so far managed to avoid recession, while the pound has strengthened against the dollar. And many smaller growth companies continue to show resilience.
Across the pond, the successful IPO of UK-based Arm Holdings could convince other British private firms that the waters are safe to go public here. Indeed, Goldman Sachs sees the European IPO market making a comeback next year. That may revive investor enthusiasm.
Finally, nine of Britain’s largest defined contribution pension schemes recently agreed to allocate at least 5% of their funds to unlisted UK start-ups by 2030. That could boost long-term interest in the small-cap scene.
I’m considering adding this ETF to my ISA due to the big turnaround potential.
