Bargain hunt

Owning a selection of value shares can deliver substantial capital appreciation over time. The theory is that these companies’ share prices will eventually correct higher as the market wises up to their earnings potential.

The iShares Edge MSCI World Value Factor ETF‘s (LSE:IWVL) a fund that provides investors with this opportunity. It holds positions in 398 businesses across the globe, with a particular focus on US and Japanese shares (these comprise roughly 40% and 22% of the fund respectively).

A large weighting of tech stocks (25% of the fund) also means large positions in the likes of Cisco Systems, Qualcomm and IBM.

Annual returns haven’t been especially high over the past decade, averaging 5.5%. If this continues, an investor could endure worse returns than if they purchased other funds.

Yet I still think it’s a good stock to consider to create a balanced portfolio.

Gunning for growth

Investors could offset the weaker returns here by also purchasing the Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ). The average yearly return here stands at an impressive 18%.

As with value stocks, investing in growth shares provides scope for substantial capital gains. This is because these companies typically experience above-average profit increases that drive share prices through the roof.

The fund’s focus on the Nasdaq means investors here also have high exposure to technology companies. This can mean poorer returns during economic downturns.

That said, it can — as we’ve already seen — provide significant returns as the digital economy explodes. Looking ahead, phenomena such as artificial intelligence (AI), quantum computing and robotics could deliver stunning investor profits.

Significant holdings here include Nvidia, Apple and Microsoft.

Targeting dividends

The final ETF to consider is the Xtrackers FTSE 100 ETF (LSE:XDUK). Investing in Footsie-focused funds has a range of advantages, including diversification across market-leading companies and exposure to a stable and mature market.

Another notable perk is that, as an asset class, British blue-chip shares have a strong culture of paying dividends, underpinned by some robust, cash-rich balance sheets. Some of the index’s largest companies include dividend darlings Shell, Unilever and HSBC.

Investing in dividend shares can help provide a healthy return across the economic cycle. Since early 2015, this fund’s delivered an average annual return of 6.4%.

UK shares have underperformed overseas equities in recent years, and this may continue as the domestic economy struggles. But I still expect the FTSE 100 to be a great place to target dividends.

A passive income of almost £25k

Past performance isn’t always a reliable guide to future returns. But if the long-term returns on these ETFs remains unchanged, a £25,000 lump sum investment spread equally across them would lead to an £495,935 (excluding trading fees) after 30 years.

Investing this in 5%-paying dividend shares could then — if broker forecasts are correct — provide a £24,796 passive income for life.

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This means an investor who put five grand into a fund that tracks the index at the start of 2023 would now have nearly £10,000. That’s an incredible result — it’s not often an index almost doubles in just two years!

Why’s this happened?

The Nasdaq 100’s made up of the largest non-financial firms on the tech-focused Nasdaq exchange. So when tech stocks sold off heavily during the 2022 bear market, the index crashed 33%.

Therefore, this hypothetical person would have timed their early 2023 investment perfectly. That’s when investors were anticipating lower interest rates due to easing inflation. Consequently, the US stock market was just starting to recover.

Also in late November 2022, generative artificial intelligence (AI) bot ChatGPT was launched. This sent shockwaves through the tech world, provoking deep-pocketed companies to make massive capital investments for fear of being left behind by this revolutionary technology.

AI-related stocks, especially chipmaker Nvidia, have since driven the Nasdaq 100 to the moon.

How to invest?

To get involved, investors could consider buying something like the Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ). The share price is up around 145% in five years!

This exchange-traded fund (ETF) holds non-tech names like Costco and Starbucks. However, 51% of it is in the information technology sector. And nearly a third’s now in just four mega-cap stocks: Apple, Nvidia, Microsoft, and Amazon.

While these are all fabulous companies, this high level of concentration presents risk. If a couple of them suddenly encounter problems, or there’s a tech sector meltdown, the Nasdaq 100 would underperform, at least for a while. Remember the 33% slump in 2022..?

And with the growth-oriented index yielding a meagre 0.4%, there wouldn’t be much income to help soothe the pain.

The index’s high valuation is certainly worth noting too. It currently has a price-to-earnings (P/E) ratio of 32, which makes this raging bull market one of the most expensive in decades.

This probably explains why billionaire investor Warren Buffett spent last year selling down some of his top holdings, including Apple. In total, he unloaded $133bn worth of shares in the first nine months of 2024!

A simple strategy to consider

Due to the high starting valuation today, I don’t expect the Nasdaq 100 to perform anywhere near as strongly over the next five years. But I think it will still do well, given the ongoing technological revolution and the high growth potential of its innovative constituents.

I hold a few Nasdaq stocks in my portfolio, so I’m not looking to get more exposure via an ETF. But for those looking to invest, I’d say it might be better to consider using a pound-cost averaging strategy.

This would involve investing at regular intervals, such as monthly or quarterly, regardless of market conditions. It would smooth out the purchase prices, thereby helping to minimise the risk of making a single large investment at a market peak. Nobody wants to do that!

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Take the following growth-based ETFs, for instance. As the chart below shows, they’ve delivered eye-popping returns during the past five years.

And if these ETFs deliver the same performance over the next five years, an investor would turn a £21,000 lump sum invested equally across them into £41,704. They’d have more than doubled their money!

Remember that past performance isn’t a guarantee of future returns. But here’s why I think they’re worth serious consideration.

Tech titan

As its name indicates, the Invesco EQQQ Nasdaq 100 ETF provides robust exposure to the tech-focused Nasdaq exchange. Just over 51% of its entire weighting is dedicated to the information technology sector.

Furthermore, the so-called Magnificient Seven stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — are among its eight largest holdings, the other being Broadcom.

These businesses are heavyweights in their respective fields. And they have the scale and the knowhow to capitalise on emerging tech opportunities like artificial intelligence (AI), quantum computing, and robotics.

Historically, the Nasdaq index can be far more volatile than the S&P 500. But over the long term it can also provide better returns, as the numbers near the top show.

Global superstar

The iShares Edge MSCI World Quality Factor also holds US tech giants including Nvidia and Microsoft. However, it provides superior diversification to the other fund, helping investors spread risk more effectively.

As the name suggests, it holds stocks from across the world rather than just those in North America. Just over 77% of its capital is held in US shares, in fact.

It also provides more even exposure to other sectors, illustrated above. Other major holdings here include Visa, Costco, and Novo Nordisk.

One drawback is that this has produced a lower return than tech funds like the one described above. But then that 12%-plus average return since 2019 is still a pretty decent return, in my opinion.

And the prospect of lower returns may be a price worth paying for better diversification to some investors.

Euro star

The iShares Core EURO STOXX 50 may have delivered a worse return than those other funds since 2019. But I don’t think an average 8%-plus shouldn’t be sniffed at! And I think it could provide much stronger returns over the next five years.

This is because of the underperformance of European shares in recent times relative to their US counterparts. It’s a lag that could, as we saw in 2024, could pave the way for exceptional capital gains from this point.

This fund also invests across a multitude of sectors. Major holdings here include semiconductor maker ASML, software provider SAP, and luxury goods specialist LVMH. In total, it holds 50 stocks, providing solid diversification.

Be aware, though, that political turbulence in much of Europe could dent future returns.

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Invesco EQQQ Nasdaq 100

What it does: This ETF tracks the Nasdaq 100 index, which represents the largest 100 non-financial companies on the Nasdaq Stock Exchange.

By Harshil Patel. The Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ) might sound like a mouthful, but it offers a simple way to own the largest growth shares.

In fact, it’s one of the largest individual holdings in my Stocks and Shares ISA. In recent years, it has become dominated by the global tech giants.

25% of the fund is invested in Apple, Microsoft and Nvidia. A further 25% of the fund is invested in Amazon, Broadcom, Meta, Tesla, Costco and Alphabet.

I find this ETF an efficient and low-cost way to own these tech heavyweights.

Performance has been stellar in recent years. For instance, over the last five years it gained 125%. And over the past decade, it’s up by a whopping 460%.

This far exceeds that of the S&P 500 and FTSE 100.

But note that returns in the Nasdaq 100 can be more volatile. In the most recent downturn in 2022, it fell by 26% vs a 10% decline in the S&P 500.

Harshil Patel owns shares in Invesco EQQQ Nasdaq 100 ETF .

iShares Core EURO STOXX 50 EUR 

What it does: the ETF tracks the performance of a diversified index made up of the 50 largest companies in Europe

By Gordon Best. I’m a big fan of investing in markets which may be undervalued. Europe has stood out to me in recent years as a region with plenty of uncertainty, but just as much quality too. iShares Core EURO STOXX 50 EUR (LSE:EUE) tracks 50 of the largest stocks across the Eurozone. It offers diversification across various sectors, including financials, consumer goods, and technology.

Of course, the European market maybe isn’t quite as dynamic as many companies in the US, but with very solid growth numbers, and experienced management, it could well capitalise on the same trends. With specialist semiconductor companies like ASML, the same growth as US companies could be seen, but as a much more reasonable valuation. 

I do have some concerns though. A strong Dollar can severely impact European companies operating in other currencies, plus there is a constant risk from geopolitical escalation as the conflict in Ukraine continues.  

Gordon Best owns shares in iShares Core EURO STOXX 50 EUR.

iShares Edge MSCI World Quality Factor ETF

What it does: The iShares Edge MSCI World Quality Factor ETF seeks to track the performance of an index composed of stocks with strong and stable earnings.

By Paul Summers. To say that I like the iShares Edge MSCI World Quality Factor ETF (LSE: IWFQ) is putting it mildly. It’s easily the biggest holding in my Stocks and Shares ISA. 

With a portfolio including the usual tech suspects as well as pharma giant Novo Nordisk, this $4bn passive vehicle has returned almost 80% in the last 5 years (at the time of writing).

The ETF focuses only on ‘quality’ stocks with track records of high returns on equity, stable earnings growth and sound finances. In other words, it avoids owning the dross. 

None of this comes free but the ongoing charge of 0.3% is reasonable compared to actively-managed funds with the same objective. 

My only real concern is that 70% of the portfolio is devoted to US stocks. With the election coming next month, there could be a bit of volatility on the cards. 

Paul Summers owns shares in iShares Edge MSCI World Quality Factor ETF.

L&G Cyber Security UCITS ETF

What it does: L&G Cyber Security ETF is made up of cybersecurity stocks and tracks the ISE Cyber Security UCITS Index.

By Ben McPoland. Warren Buffett said something really interesting a few months ago. He predicted that AI-enabled scamming is going to be “the growth industry of all time“. 

I think he’s right. As well as tricking people, AI can be used to create malware that adapts its behaviour to avoid detection by traditional antivirus software.

This is partly why I have the L&G Cyber Security ETF (LSE: ISPY) in my ISA. The ETF holds a basket of cybersecurity giants, including Palo Alto Networks and CrowdStrike.

Barely a week goes by nowadays without some major hacking incident. So this investment offers me thematic exposure to an industry that research firm McKinsey thinks could one day be worth $1.5trn.

Naturally, the ETF is closely tied to the performance of certain cybersecurity companies. These may face hacks, innovation challenges, or competitive pressures.

But since launch in 2015, the share price is up around 150%. I expect it to continue climbing over time as earnings in the cybersecurity sector grow.

Ben McPoland owns shares in CrowdStrike and L&G Cyber Security UCITS ETF. 

VanEck Semiconductor ETF

What it does: The ETF invests in the 25 largest US-listed companies producing semiconductors, or semiconductor equipment. 

By Dr James Fox. The semiconductor sector is fast-moving with consistent technological developments and innovation cycles. In fact, this fast-paced environment can make it challenging for shareholders to stay updated on the latest developments and trends.

So, while I do invest in individual semiconductor stocks, an ETF which invests in the 25 largest US-listed companies producing semiconductors, or semiconductor equipment allows me to spread risk and hedge my bets. 

The VanEck Semiconductor ETF (NASDAQ:SMH) has performed very well in recent years, up 46% over 12 months and 269% over five years. However, potential investors may be intrigued to see that the share price has pulled back in recent months. 

This does create an interesting entry point, but also reflects the constantly shifting sentiment relating to artificial intelligence and data centres – these sectors have driven demand for high-end chips over the past 18 months – which may represent a risk. 

Personally, I’m looking beyond the near-term volatility and thinking about where this stock could be in a decade as our economies become increasingly reliant on semiconductor technology. 

James Fox owns shares in VanEck Semiconductor ETF

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HSBC S&P 500 UCITS ETF 

What it does: HSBC S&P 500 UCITS ETF tracks the performance of 500 of the largest companies listed on US stock exchanges.  

By Royston Wild. Billionaire investor Warren Buffett has long championed S&P 500 index funds as a great way for investors to create wealth. I chose to do so earlier this month by opening a position in the HSBC S&P 500 UCITS ETF (LSE:HSPX).

Having exposure to hundreds of different companies helps me to spread risk. This fund’s focus on large stocks with significant competitive advantages (also known as economic moats) provides me with extra protection, too. 

I also like the solid exposure to tech stocks that this fund provides. Almost 29% of its capital is sunk into the information technology sector, which in turn gives me an opportunity to capitalise on themes like artificial intelligence, cybersecurity, cloud computing and e-commerce.   

As a UK investor this ETF leaves me exposed to currency risk. However, the excellent long-term return that S&P 500 investors have enjoyed still make this an attractive financial instrument to hold, at least in my opinion. 

The S&P 500 has risen a stunning 2,674% in value during the past 40 years. No wonder Mr Buffett is a fan of funds that track the index, then. Remember that past performance is not a reliable indicator of future returns. 

Royston Wild owns HSBC S&P 500 UCITS ETF. 

Invesco EQQQ Nasdaq 100 ETF 

What it does: This ETF aims to track the total return performance of the Nasdaq 100 index, which is the largest 100 companies listed on the Nasdaq stock exchange. 

By Harshil Patel. I own the Invesco EQQQ Nasdaq 100 ETF (LSE:EQQQ) to gain access to some of the largest companies in the world, at low cost. Its ongoing annual charge is just 0.3% and its top holdings include Apple, Microsoft and Amazon. 

The Nasdaq 100 is typically seen as a technology-focused index. Indeed, around 50% of stocks are in this sector. But I like that it also includes a variety of other industries too.  

For instance, it allows me to own high-quality non-technology shares such as Costco Wholesale, and PepsiCo. 

Note that 46% of this Nasdaq100 ETF is concentrated in its largest 10 stocks. This is great when these companies are growing, but could be a risk if they face a significant challenge at the same time.  

Given the rise of tech giants, this ETF has performed very well in my opinion. Over the past 10 years, it has managed to grow by 17% a year. That would have turned a £20,000 Stocks and Shares ISA into a whopping £96,136. 

Harshil Patel owns shares in Invesco EQQQ Nasdaq 100 ETF. 

iShares Edge MSCI World Quality Factor ETF

What it does: The iShares Edge MSCI World Quality Factor ETF seeks to track the performance of an index composed of stocks with strong and stable earnings.

By Paul Summers. Just like Warren Buffett and the UK’s own Terry Smith, I’m a huge fan of ‘quality’ companies that possess strong brands, generate consistent profits and boast robust finances.

Given this, it’s no surprise that a good chunk of the money in my ISA is invested in the iShares Edge MSCI World Quality Factor ETF (LSE: IWFQ) 

Made up of 301 stocks including credit firm Visa and pharma giant Eli Lilly, this liquid (easily traded) fund delivered a total return of 25.7% in 2023. In five years, it’s up over 70%. As I type, that’s more than 8 times what the FTSE 100 has achieved (dividends excluded).

This easily justifies the ongoing charge of 0.3%, especially when compared to actively managed funds with the same objective. 

My only worry is that having 70% of the portfolio invested in US stocks could come back to bite me.

Paul Summers owns shares in iShares Edge MSCI World Quality Factor ETF

L&G Cyber Security UCITS ETF

What it does: L&G Cyber Security ETF is made up of stocks from the cybersecurity industry. It tracks the ISE Cyber Security UCITS Index.

By Ben McPoland. Hardly a week goes by nowadays without another major hacking incident. In recent times there have been cyber attacks on many institutions and businesses, including the British Library, Boots, the BBC and Royal Mail.

Unfortunately, this could be the tip of a very large and unpleasant iceberg, especially as AI continues developing. So it’s little wonder research firm McKinsey thinks cybersecurity should one day become a $1.5trn industry.

This is why I hold the L&G Cyber Security ETF (LSE: ISPY) in my Stocks and Shares ISA. It contains all the major players in the industry, including CrowdStrike Holdings, SentinelOne and Palo Alto Networks.

The thing I like here is that this gives me broad-based exposure to what can be a complex and rapidly-evolving industry. For me, that removes a lot of the stress and hassle.

One issue I’d highlight is that many of these stocks had a great run last year, and this was reflected in the ETF’s gain of 35%. Consequently, valuations might be getting a little stretched, which is worth bearing in mind.

There is a 0.69% ongoing charge.

Ben McPoland owns shares in CrowdStrike Holdings and L&G Cyber Security UCITS ETF.

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