UK share investors don’t have to sacrifice performance to achieve effective diversification. There are more than 3,600 exchange-traded funds (ETFs) currently listed on the London stock market. This means investors can assemble a well-balanced portfolio that reduces risk, while also leaving room for substantial capital gains and dividend income.
With this in mind, here are three quality ETFs to consider for a hopefully five-star Stocks and Shares ISA.
AI fund
Nvidia‘s blockbuster interims last week underline the huge investment opportunity of artificial intelligence (AI). These showed revenues up a 56% in the three months to June, to a mammoth $46.7bn as demand for its high-power microchips surged.
The AI growth potential is huge, though investing in one company to capitalise on it carries significant concentration risk. This is why the iShares AI Innovation Active UCITS ETF (LSE:IART) — which holds 39 different tech shares — could be a balanced option to consider.
As well as holding Nvidia shares, the fund owns other AI pioneers including social media giant Meta, software developer Microsoft and cloud storage provider Snowflake.
This iShares product has only been in existence since January. Its performance has been turbulent as concerns over the economic outlook have depressed investor confidence. But I’m optimistic it will deliver big long-term returns as AI adoption gallops higher.
Value hero
Owning value shares in a portfolio can safeguard it from stock market volatility. The theory is that their cheapness can provide a cushion when everything else is falling.
Running with this idea, I believe the Xtrackers MSCI World Value ETF (LSE:XDEV) is worth serious attention. It holds roughly 400 shares in its portfolio, and bases its strategy around popular metrics like the price-to-earnings (P/E) and price-to-book (P/B) ratio.
Underlining its value credentials, some of its largest holdings include chipmakers Qualcomm and Intel. These also have substantial growth potential amid the AI boom. But they trade at a fraction of the price of some of Silicon Valley’s big beasts like Nvidia.
I also like this Xtrackers ETF because of its wide geographic footprint. Be aware however, that US shares represent its single largest weighting (38%), which may present a problem if investors rotate out of Wall Street equities.
Dividend ETF
A portfolio with dividend shares can help investors make a decent return when stock market weakness limits the potential for capital gains. I believe the Global X SuperDividend ETF (LSE:SDIP) is one such fund to look at for a long-term passive income.
This ETF tracks the performance of 100 of the highest-yielding dividend shares on the planet. As a consequence, it has one of the largest forward dividend yields of any London-listed ETF, at 9.7%.
What I also like is its strategy of paying dividends out monthly (it’s done this consistently for 13 years). This gives investors regular access to cash rewards, and therefore the chance to reinvest them sooner to boost the wealth compounding effect.
Despite its high weighting of cyclical and energy shares — these account for more than 50% of the entire fund — I think it’s a top passive income source to consider.
