It has been a tough year for investors, with global stocks entering a bear market amid the war in Ukraine, rocketing inflation, an energy price shock, China’s Covid-19 lockdowns and soaring US interest rates.
Yet, investing is cyclical and often the best time to buy is when markets have fallen and equities are cheap.
Today will almost certainly be a better time to buy shares and bonds than this time last year, when everybody wanted them.
We asked four investment experts to name their favourite exchange-traded funds (ETFs) for 2023.
It is important to remember to only buy these funds as part of a balanced portfolio with the aim of holding them for a minimum of five years but ideally longer.
The iShares US Dollar Tips fund
Rob Burgeman, senior investment manager at wealth manager RBC Brewin Dolphin, picks an ETF that invests in US Treasury Inflation-Protected Securities, known as Tips, which offers protection from rising prices.
These US government bonds offer inflation protection by paying between 1.25 per cent and 1.5 per cent on top of the US consumer price inflation rate, he says.
The iShares US Dollar Tips fund largely invests in short-duration bonds spanning one to five years, rather than 20 or 30 years, making it less volatile.
“This ETF won’t set your pulse racing, but should provide lower-risk returns over the next few years,” Mr Burgeman says.
The Fidelity US Quality Income ETF
The US economy is still the one to beat, according to Mr Burgeman.
“It is likely to remain the engine room of global growth and its equities are the bellwether for other international markets,” he says.
The era of debt-fuelled expansion and rampant technology stocks is now over, as the US Federal Reserve tightens monetary policy, and investors should now seek more steady, solid stocks.
Mr Burgeman tips the Fidelity US Quality Income ETF, which offers investors exposure to the largest companies in the US such as Apple, Microsoft, Chevron, Eli Lilly, Home Depot and Procter & Gamble.
“Yet, its focus on income makes it more diverse and less growth-orientated than a simple index tracker,” he says.
The fund has beaten the S&P 500 index over the past five years, while paying a slightly higher income with a yield of 2.25 per cent, according to Mr Burgeman.
The iShares Core Global Aggregate Bond UCITS ETF
Equities and bonds both fell in 2022, which is unusual as their performance does not usually correlate, says Victoria Scholar, head of investment at Interactive Investor.
“This gives investors an opportunity to invest in beaten-up bonds, which are considerably cheaper than they were a year ago,” Ms Scholar says.
Bonds fall out of favour when interest rates are rising as their fixed income looks less attractive, but interest rates are likely to peak in 2023, she says.
“The Fed will become less aggressive and may even cut rates towards the end of the year.”
Watch: US Federal Reserve chief warns of 'pain' in reducing inflation
US Federal Reserve chief warns of 'pain' in reducing inflation
This ETF also has strong geographical diversification, including the US, China, the UK and other major economies. It currently yields 3.36 per cent.
“It is packed with bonds that will keep paying their coupons even under tough economic conditions,” Ms Scholar says.
The iShares Core MSCI EM IMI ETF
This has been a tough year for emerging markets, too, with the sector falling 17.43 per cent in the year to November 30, according to MSCI.
Laith Khalaf, head of investment analysis at AJ Bell, says 2023 could also be tough at first, but emerging markets have a habit of outperforming when sentiment turns, and he tips the iShares Core MSCI EM IMI ETF.
“Like many ETFs, this one’s name is a bit of an alphabet soup, but its objective is pretty simple. To give investors low-cost passive exposure to emerging market shares,” he says.
Developing economies have long-term growth potential, but their stock markets can be volatile and risky.
“Investors need to be willing to ride considerable ups and downs,” he says.
The Vanguard FTSE 250 ETF
London’s benchmark FTSE 100 index of UK blue chip stocks has been one 2022’s best performers, remaining pretty much flat.
It has been a safe haven as it contains solid, old school companies such as banks, miners and oil companies that pay generous dividends.
Medium-sized companies listed on the FTSE 250 have had a much harder time, with the index crashing 21.12 per cent in the year to date.
They have far more exposure to the struggling domestic UK economy than the globally focused FTSE 100.
Yet, Mr Khalaf favours the FTSE 250 for 2023 and says investors can access it cheaply through the Vanguard FTSE 250 ETF.
“The mid-cap segment of the UK stock market has sold off considerably, leaving it trading at a more attractive level. Over the long term, this has been a lucrative index for investors,” he says.
The iShares MSCI World SRI UCITS ETF
The past year has also been tough for ethical investors focused on the environmental, social and governance (ESG) sector.
After rocketing 25.29 per cent in 2021, the MSCI World ESG Leaders Index had fallen 11.73 per cent by November 30.
ESG stocks and funds are often tilted towards more growth-orientated areas of the market, which have sold off.
“Many socially responsible funds also exclude fossil fuel producers that have done well from soaring energy prices,” Mr Khalaf says.
The fund focuses on companies with high ESG scores and could prove an attractive opportunity for long-term investors who want to invest their money responsibly.
The First Trust Consumer Staples AlphaDEX Fund
The consumer staples sector is considered to be defensive in tough times because it covers goods that consumers keep buying such as food, drinks, tobacco, household goods, toiletries and cosmetics.
This ETF invests in a selection of US large cap consumer staple stocks from the Russell 1000 index, says Vijay Valecha, chief investment officer at Century Financial.
“The ETF is adept at weeding out underperformers and cherry-picking winners, and is up 11.39 per cent in a year when most sectors have fallen.”
It runs a concentrated portfolio of only 41 holdings, making it higher risk but with the chance for superior returns.
The Utilities Select Sector SPDR Fund
This ETF is a US-focused fund that tracks the performance of the Utilities Select Sector Index, offering defensive, lower-risk returns. It currently yields 3.04 per cent.
The index includes communication services, electrical power providers and natural gas distributors, Mr Valecha says.
“Utility sector companies exhibit lower volatility and provide a desirable source of predictable investment returns from dividends,” he says.
The iShares iBoxx $ Investment Grade Corporate Bond ETF
This ETF bond fund seeks to track the investment results of an index composed of US dollar-denominated, investment-grade corporate bonds.
The fund has fallen 14.95 per cent over the past 12 months, but now could be a good time to buy into its 5.06 per cent yield at a reduced price, Mr Valecha says.
“The risk with corporate bonds is that the issuing company goes bust and defaults, but there are slim chances with this fund as top holdings such as Goldman Sachs, Bank of America or Apple are not going to just disappear,” he says.
Energy Select Sector SPDR Fund
After naming three low-risk funds, Mr Valecha’s final tip is a bit riskier.
This has been a good year for energy stocks but it has ended on a low, with Brent crude erasing all its gains after falling to $76 a barrel.
Next year could be better, as Opec sticks by oil output curbs, the West continues with sanctions against Russian crude exports and US shale output stagnates.
“This may all prove bullish for oil prices and the Energy Select Sector SPDR Fund could benefit,” Mr Valecha says.
