The UK’s strong economic outlook

There are reasons to be optimistic for companies doing business in the UK. First, Boris Johnson has just announced the removal of all outstanding Covid restrictions as part of a “living with Covid plan”. This has been greeted with a positive reaction from the hospitality industry and airlines, and is likely to give our economy a boost.

Second, according to a recent report by the International Monetary Fund, the UK’s economy will expand by 4.7% in 2022. This is one of the largest annual increases among the G7 developed nations.

Focussing on the FTSE 250

I think that the index has some good companies in sectors such as travel, leisure, and retail that could make the most of the post-Covid economic recovery over the next few years. Also, whereas some FTSE 100 companies derive a lot of their earnings from outside the UK, a majority of FTSE 250 companies are more reliant on domestic economic conditions. For these two reasons, I see some significant upside potential from the stocks in the index.

Although I could pick individual shares, for my own portfolio, I think the best way of investing is with a FTSE 250 exchange-traded fund (ETF). This allows me to own all the companies in the index by holding just one share.

I’m looking at Vanguard FTSE 250 UCTIS ETF (LSE: VMID) which is a large fund, with almost £3bn in assets under management. It’s well established (around eight years old) and has a low management fee of 0.11%. This fund has both an accumulation and a dividend-paying option. Personally, I like the income stream option and the current yield is 2.55%.

Performance

At first glance, the share price performance of the ETF seems underwhelming. Over the last 12 months, it’s about flat and year-to-date down around 13%. However, most of the decline has been since January and 2022 has been a turbulent time for much of the stock market so far. I prefer to look over a longer time horizon and over the last three years, the fund’s price is up almost 7%.

One of the problems with buying an index is that I can only earn the returns of the FTSE 250. It’s certainly possible that if I could pick the right shares, then I might be able to earn a bigger return. However, I’m comfortable settling for what might be a lower return for the benefit of having greater diversification by owning the index.

Of course, nothing is certain and rising inflation and interest rates could hurt some companies’ earnings. That said, I think that the FTSE 250 has stocks in it that can still perform well in 2022 and I’m seriously considering adding this FTSE 250 ETF to my holdings as part of a balanced portfolio.

If you’re aiming to generate high returns over the next decade, it could pay to diversify your portfolio outside the FTSE 100. Here’s a look at three ETFs that could potentially generate strong returns over the next 10 years.

Technology

If you’re looking to capitalise on advances in technology, take a look at the ROBO Global Robotics and Automation GO UCITS ETF (LSE: ROBG). This ETF tracks an index of companies that are involved in the robotics industry. Over the last three years, it’s returned nearly 80%. 

Robotics is not a new field, but robot technology has advanced significantly in recent years and looking ahead, the industry has the potential to grow at an exponential rate. Robots are now significantly more intelligent than they were in the recent past and today’s robots can perform sophisticated tasks across a wide range of industries.

Already, many companies are employing the technology to enhance productivity. Amazon, for example, uses a large number of bots in its warehouses. By 2030, up to a third of UK jobs could be done by robots, according to consultancy firm PricewaterhouseCoopers. As such, now could be a good time to invest in the sector, while it’s still in its infancy.

But do note that an ETF of this kind is higher risk than a FTSE 100 ETF. Therefore, it may not be suitable for all investors.

Emerging markets

One ETF that looks to offer excellent exposure to fast-growing economies is the Vanguard FTSE Emerging Markets UCITS Fund (LSE: VFEM).

It specialises in a high-growth area that really could be worth considering if you’re looking for strong long-term returns: the world’s emerging markets. They are home to 80% of the world’s population and are growing at around twice the pace of developed markets. From a long-term investment perspective, there’s significant appeal.

Vanguard tracks an index of large and mid-cap companies in countries across Asia, Africa, Latin America and Europe. It currently holds over 1,000 stocks with strong exposure to China, Taiwan and India. It could be a rewarding investment for those with a long-term mindset.

Mid-caps

Lastly, if the ETFs listed above are too adventurous for you, consider the Vanguard FTSE 250 UCITS ETF (LSE: VMID). This ETF is UK-focused, but instead of tracking large-cap companies, it tracks the largest 250 stocks outside the FTSE 100.

The FTSE 250 is home to many fast-growing companies, and as a result, the index has historically generated excellent long-term returns for investors. For example, for the five years to the end of May, investors enjoyed returns of 10.7% per year. That’s a 50% higher return than the FTSE 100 each year. 

For those who prefer to invest in the UK, yet would like a little more growth over the long term, VMID could be a good UK-focused play.

In a recent article, I examined three types of funds that are popular among both beginner investors and experienced investors alike. These included mutual funds, investment trusts and exchange-traded funds (ETFs).

Today, I’m looking at two ETFs that I would definitely consider buying if I was investing my first £1,000 now.

Vanguard FTSE 100 Index Unit Trust

A portfolio of blue-chip companies is a good foundation for any portfolio. With that in mind, if I was investing my first £1,000 today I would consider investing in the Vanguard FTSE 100 Index Unit Trust (LSE: VUKE). This ETF can be bought and sold just like a regular stock under the VUKE ticker.

Vanguard is a highly regarded ETF provider. This particular fund attempts to track the performance of the FTSE 100 index, the UK’s main stock index. That means an investor will gain exposure to the some of the largest companies listed in Britain, many of which are well known across the world. The top 10 holdings of the index are shown below:

Source: Vanguard, data as of 29 December 2017

Fees are low, with the ongoing charge just 0.06%. I would probably invest £500 of my first £1,000 in this fund to gain exposure to the largest companies listed on the London Stock Exchange.

Vanguard FTSE 250 UCITS ETF

Once I had my core holding of blue-chip shares sorted with the FTSE 100 ETF listed above, I’d also be interested in getting some exposure to mid-cap stocks. These are companies that are slightly smaller companies, yet are often growing at a faster pace. This means that they may offer the potential for larger investment returns.

To get exposure to mid-caps, the FTSE 250 index is a good place to start. This index contains the largest 250 stocks in the UK after the largest 100 companies. It’s performed very well over the long term. For example, for the five years to the end of 2017, the FTSE 250 provided a total return 92%. This easily eclipsed the 57% return of the FTSE 100.

Vanguard also has an ETF tracking this index. It’s the Vanguard FTSE 250 UCITS ETF (LSE: VMID). The top 10 holdings are listed below. It includes household names such as Royal Mail, Rightmove and Travis Perkins.

Source: Vanguard, data as of 29 December 2017

The ongoing charge here is just 0.1%. I’d invest the remaining £500 of my £1,000 in this ETF to add a little more growth exposure to my portfolio.

However, if I was going to buy an ETF today with the intention of holding it for the long-term, there’s several other ETFs I would consider buying over the FTSE 100 variant. Here’s a look at three such ETFs offered by investment manager Vanguard.

Vanguard S&P 500 ETF

To diversify your portfolio properly, it’s a good idea to add international stocks to the mix, in my opinion. There are several reasons for this. The first is that international stock markets can perform differently at different times. For example, while the FTSE 100 returned 9.4% per year for the five years up until the end of August, the US’s S&P 500 index returned 14.3% per year in the same time period. That’s a fairly significant difference.

Secondly, the composition of the key US index, differs remarkably from the composition of the FTSE 100 index. For example, the top five stocks by market capitalisation in the FTSE 100 at the end of August were HSBC Holdings, British American Tobacco, Royal Dutch Shell A, BP and Royal Dutch Shell B. In short – banks, tobacco and oil.

However, turning to the S&P 500, the top five stocks at the end of August were Apple, Microsoft, Facebook, Amazon.com and Johnson & Johnson. That’s a much higher exposure to the fast-growing technology sector.

The Vanguard S&P 500 ETF (LSE: VUSA) could be an excellent way of gaining exposure to the S&P 500 index. Ongoing charges are just 0.07%. 

Vanguard FTSE 250 ETF

Another growth ETF I’d buy would be a FTSE 250 one, thereby investing in the 250 largest companies, outside the FTSE 100. There’s some fantastic up-and-coming companies in this index, such as DS Smith, RPC Group and Aldermore Group, and that has facilitated a five-year index return to the end of August of 14.7% per year.

While you’d think that the mid-cap index would be riskier than its big brother, according to FTSE Russell data, the five-year volatility for the FTSE 250 was 9.9% vs 10% for the FTSE 100, suggesting that over the long term, risk was actually slightly lower.

A good choice here in my opinion is the Vanguard FTSE 250 ETF (LSE: VMID). Ongoing charges are 0.10%.

Vanguard Emerging Markets ETF

Lastly, I’d also look at investing a portion of my portfolio in the emerging markets. A good option could be the Vanguard Emerging Markets ETF (LSE: VFEM).

Emerging markets as a whole are growing at a rate significantly higher than most developed countries. Furthermore, emerging markets now contribute up to 60% of the world’s GDP, according to the International Monetary Fund. As a long-term investor, I would want to capitalise on this growth. 

The Vanguard Emerging Markets ETF provides exposure to countries such as China, Taiwan, India and Brazil, and with a low ongoing charge of 0.25%, looks to be a good way to invest in these fast-growing economies.