If you’ve got a Stocks and Shares ISA, now’s also a good time to check your investment strategy to make sure it’s robust. Are you diversified enough?

The importance of diversification

The last few years have shown why it’s vital to be diversified.

In both 2023 and 2024, UK stocks underperformed relative to other markets. In 2023, the FTSE 100 delivered a total return of just 4.7%. The following year, it returned 7.9%. Over the same period, America’s S&P 500 index returned 26.3% and 25% (in US dollar terms) – much higher returns.

Of course, this year the S&P 500 has struggled, falling about 5% (and 9% from its highs). But plenty of other geographic markets have done well. Year to date, Europe’s Euro Stoxx 50 index is up about 8%. Meanwhile, Germany’s DAX index is up about 11%.

The takeaway here is that different geographic markets often don’t move in sync. Sometimes, returns will be very uncorrelated.

By taking a diversified approach, and building a portfolio that has exposure to many different geographic regions (and different industries), investors can minimise the impact of underperformance in specific areas of the market. This can potentially smooth out their returns and lead to better performance over the long term.

An ETF to consider

If an investor is looking to diversify their portfolio, one fund I think could be worth considering (especially for those with a lot of exposure to US stocks) is the iShares Edge MSCI Europe Quality ETF (LSE: IEFQ). This is an ETF that offers access to European stocks (and includes UK stocks).

What I like about this particular ETF is that it’s focused on the ‘quality’ factor. In other words, it’s focused on companies that have strong and stable earnings and solid balance sheets.

Over the long term, companies with these attributes (high-quality companies) tend to provide higher returns for investors than low-quality businesses do. This is illustrated by the performance of this ETF – over the 10 years to the end of February 2025 it returned about 95% (in euro terms) versus 73% for the regular iShares MSCI Europe ETF.

It’s worth pointing out that there are some brilliant companies in the ETF. Some names worth highlighting include ASML, AstraZeneca, Nestlé, London Stock Exchange Group, LVMH, Novo Nordisk, and L’Oréal.

Overall, there are about 120 different stocks. The sectors with the largest weightings are Financials, Industrials, and Healthcare.

Now, there are plenty of risks to take into account with this product, of course. Donald Trump’s tariffs on Europe are one – these could lead to lower earnings across the continent.

Political turmoil and geopolitical instability are other issues worth highlighting. These could lead to negative sentiment towards European stocks.

Yet I think this ETF has a lot of appeal as a portfolio diversifier. With its low annual fee of 0.25%, I see it as a long-term winner to consider.

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