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Exchange-traded funds (ETFs) offer the opportunity to invest in large groups (often hundreds) of stocks at once. The advantage of this is that I can diversify my stocks and shares ISA immediately and then sit back and let the compounding do its work over time.
Here I’m going to look at two ETFs I would buy today to start an ISA.
Global clean energy
When I imagine which types of companies could become very large in the future, I keep coming back to the theme of CO2 reduction. That’s because the energy transition is a multi-decade process that will require large amounts of investment and the brightest minds to get it right.
Which brings me to it iShares Global Clean Energy UCITS ETF (LSE: INRG). This fund tracks the S&P Global Clean Energy index, which consists of approximately 100 publicly traded companies involved in clean energy production.
The assets include First solar energy And Vestas Wind Systems, the world’s largest manufacturer of wind turbines. It also holds up Orstedwhich recently unveiled its first solar project in Britain.
Now, clean energy projects tend to be very sensitive to interest rates because building the infrastructure requires a lot of upfront capital. Now that rates have risen sharply, the renewable energy sector has faced headwinds. These can last for a while.
This is reflected in the share price, which has fallen 34% in the last year. However, if we zoom out over a five-year period, the performance is much better: shares are up 84%.
I think this dip could be a good time to invest, especially since interest rates could peak soon. So I plan to open a position myself soon.
British smaller companies
Next I would invest in the iShares UK Small Cap UCITS ETF (LSE:CUKS). This gives investors exposure to 255 UK stocks, with a particular focus on smaller companies. These vary from Central And Games workshop at the top to Moon pig And Judges Scientific at the other.
The UK’s smaller business category has fallen massively out of favor this year and is among the worst performing in the world. Rising interest rates to tackle stubbornly high inflation have fueled the threat of a recession, and that risk remains.
As a result, the fund’s share price has fallen 22% over the past two years (although it is only 8% over five years).
Still, I think there are reasons to be optimistic that this performance can improve.
First, as already mentioned, interest rates may be about to peak as inflation cools. This should improve investor sentiment around UK-focused companies.
Moreover, it should not be forgotten that the British economy has so far managed to avoid a recession, while the pound has appreciated against the dollar. And many smaller growth companies continue to show resilience.
Across the pond, the successful IPO of the British company Arm positions could convince other British private companies that the waters here can be safely made public. Indeed, Goldman Sachs sees the European IPO market making a comeback next year. That could revive investor enthusiasm.
Finally, nine of the UK’s largest defined contribution pension schemes recently agreed to allocate at least 5% of their funds to unlisted UK start-ups by 2030. That could boost long-term interest in the small cap scene.
I’m considering adding this ETF to my ISA due to its high turnaround potential.
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