The Best ETFs to Watch in 2023

Vanguard Health Care ETF

Source: Vanguard – Data as of 30 June 2023 (Distribution Yield as of 7 July 2023). Past performance is not a reliable indicator of future results.

As its name implies, this ETF tracks the performance of an index composed of US companies which operate in the healthcare sector.

During times of economic uncertainty, investors tend to gravitate towards stocks which operate in defensive industries or, in other words, industries where demand tends to remain fairly steady throughout the economic cycle. In theory, so-called defensive stocks should be able to rely on a constant stream of revenue regardless of what is happening in the wider economy.

Healthcare is one of the best examples of a defensive industry. Unfortunately, people get ill and require medical treatment throughout all stages of the economic cycle, and expenditure on healthcare is not something which can be easily deferred.

Consequently, companies which operate in the healthcare sector tend to perform fairly consistently, and it’s this kind of consistency which investors may value until the economic outlook becomes clearer.

iShares Core MSCI Japan IMI UCITS ETF

Source: iShares – Data as of 30 June 2023. Past performance is not a reliable indicator of future results.

As many economies slow or flirt with recession, Japan’s economy has been robust so far in 2023, expanding 2.7% in the first quarter, and things are looking promising for the country’s economic outlook. Consequently, one of the best ETFs to buy now could be one which tracks the Japanese stock market, such as the iShares Core MSCI Japan IMI UCITS ETF.

As with many parts of the world, Japanese inflation is historically high. However, unlike many other parts of the world, this isn’t necessarily a bad thing for Japan. For much of the last couple of decades, Japan has struggled with low inflation, with the Consumer Price Index (CPI) straying into negative territory on many occasions.

However, inflation currently hovers around 3%, above target levels, but nowhere near the levels seen in other developed economies recently. But, hold on, isn’t inflation bad? Well, yes and no.

Unchecked inflation which rises too quickly is indeed a negative for the economy. However, a low and stable rate of inflation is generally viewed as being conducive to a healthy economy, as it encourages consumers to spend rather than save. This helps stimulate the economy and leads to increased business earnings, both of which are positive for the stock market.

Conversely, when inflation is very low – or negative, a phenomenon known as deflation – it reduces this incentive for consumers to spend money in the present. This can be a drag on economic growth and, indeed, it has been for Japan in recent years. Despite being the third largest economy in the world, Japan’s GDP growth and stock market performance has often underwhelmed.

The performance metrics of the ETF highlighted in the table above make this abundantly clear. Compare the five-year performance of this fund to that of a fund which tracks one of the US benchmark indices (which we will look at shortly) and you will see just how stagnant the Japanese stock market has been in recent years.

Inflation, as well as potentially stimulating the economy, may also incentivise people who previously saved money in the bank to turn to the stock market in an attempt to counteract the devaluing effect of inflation on their money. This would also have an upwards effect on the stock market.

Add to this the fact that, unlike many central banks, the Bank of Japan (BoJ) has held its interest rates at ultra-low levels, and things are currently looking good for the Japanese markets.

Nevertheless, as with any investment, there are risks associated with investing in this ETF and investors should approach it with caution. Whilst it has risen more than 12% in the first half of 2023, it is possible that the improved sentiment around investing in Japanese stocks will fade, causing the ETF to fall.

Furthermore, whilst inflation has fallen in the first half of the year and is currently at a fairly manageable level, ongoing ultra-loose monetary policy from the BoJ may fuel further price increases in the future.

Vanguard S&P 500 UCITS ETF (VUSA)

Source: Vanguard – Data as of 30 June 2023 (Distribution Yield as of 7 July 2023). Past performance is not a reliable indicator of future results.

After soaring 21% in 2021, the S&P 500 plummeted by more than 20% in 2022, erasing all its gains from the previous year. Nevertheless, in the first half of 2023, the index has thrived, gaining more than 16%.

The S&P 500 is a stock index which tracks the performance of 500 of the largest companies listed on the US stock exchanges. The long-term performance of this index has been exceptional, producing an average total annual return of around 10% for more than five decades.

Although 10% may not sound like a terribly striking figure, over the long-term, this kind of growth has the potential to create significant wealth for investors who contribute to their investments regularly.

This impressive long-term growth means that ETFs which track the S&P 500 are frequently touted amongst the best ETFs to buy and hold. One such ETF is the Vanguard S&P 500 UCITS ETF, which boasts very low fees.

An investment in this S&P 500 ETF offers investors instant diversification over 500 successful US companies from a variety of industries. However, investors may want to consider that the index is becoming increasingly weighted towards technology stocks which could cause issues if this industry struggles in the future.

iShares NASDAQ-100 UCITS ETF

Source: iShares – Data as of 30 June 2022 (Distribution Yield as of 7 July 2023). Past performance is not a reliable indicator of future results.

After struggling for most of 2022, technology stocks have come roaring back in 2023. In fact, much of the S&P 500’s gains this year have been thanks to a handful of mega-cap tech stocks. What if you want to focus your investment more on this revival in the technology sector? What is the best tech ETF?

The Nasdaq-100 index is composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Exchange. Although the index spans a number of industries, it is heavily skewed towards technology.

Consequently, for those feeling bullish on the tech sector, an ETF tracking the Nasdaq-100 may be a good option for 2023. The iShares NASDAQ-100 UCITS ETF is one such ETF.

After a year to forget in 2022, when the ETF fell by 32.7%, it has so far fared much better in 2023, gaining almost 40%, which places it amongst the best performing ETFs in the first half of 2023.

However, despite holding stakes in 100 different companies, as stocks in the underlying index are weighted according to their market capitalisation, the performance of this ETF is strongly influenced by a handful of companies.

At the time of writing, the following seven stocks account for almost 55% of the entire fund:

• Microsoft
• Apple
• Amazon
• Nvidia
• Meta Platforms
• Tesla
• Alphabet (Google)

As things stand then, the success of this ETF is heavily dependent on the continued success of these companies. Whilst these stocks have been some of the best performing stocks in recent years, hence why this has also been one of the best performing ETFs over the last decade, their continued growth is not guaranteed. Investors should, therefore, bear this in mind before investing in a Nasdaq-100 ETF.