With difficult financial times coming and the possibility of a recession, 2023 will not be an easy year for investors. Companies are dealing with rampant input cost price inflation, which is at a 40-year high, increasing energy costs, rising interest rates, and ongoing interruption from the Ukraine crisis.
As a result, we have included a combination of defensive and recovery bets in our list of the top investments to watch in 2023 to balance risk and the likelihood of recovery and development in other sectors, such as technology and renewable energy.
- Top dividend payers
- Artificial intelligence
- Renewable energy
- Autonomous and electric vehicles
- Small caps
While most of the West may face a recession next year, massive spending on infrastructure projects continues throughout the world. The US and UK governments have both authorized large-scale building and construction programs in recent years, and the global infrastructure industry is expected to be worth $2,242 billion in 2021, according to Mordor Intelligence, and $3,267 billion in 2027.
Rather of purchasing individual shares, an exchange-traded fund, such as the Alerian Infrastructure ETF, is a fantastic way to participate in this trend. These spread risk by investing in a pool of diverse firm shares.
The $493 billion ETF invests in 30 infrastructure businesses, betting on what it calls the ‘North American energy revolution’. It invests in assets such as major pipelines and energy suppliers in North America, tracking the Alerian Midstream Energy Select Index, with the goal of increasing both capital and income. Enbridge, a Canadian offshore wind provider, is among its top ten holdings, as are Enterprise Product Partners, a Texas-based midstream crude oil and natural gas supplier, and Energy Transfer LP.
Top dividend payers
In difficult times, cash is king, and consistent dividend income can be critical. Investing in a dividend ETF is an excellent method to go about this. The iShares UK Dividend UCITS ETF invests in 50 UK-listed businesses with top dividend yields, providing diversified exposure to UK firms in the FTSE 350’s higher yielding subset.
Rio Tinto, Anglo American, Imperial Brands, Persimmon, and Vodafone are among its top ten holdings. The fund has returned 62.7% over ten years, 9.6% over five years, 7% over three years, and 4% over one year. However, it has underperformed during the last six months, falling 4.6%. The cost-to-income ratio is 0.4%.
According to Mordor Intelligence, the international market for cyber security was valued $150.37 billion in 2021 and is predicted to treble to $317.02 billion by 2027. The L&G Cyber Security UCITS ETF is one method to gain exposure to this subject.
This ETF invests in 45 cyber security equities and tracks the ISE Cyber Security UCITS Index. According to its executives, the industry is a “mega-trend that is radically transforming the way we live and work.” The fund focuses on infrastructure suppliers that provide hardware and software to protect data, websites, and networks, as well as service providers who provide consultancy and secure cyber-based services.
Anglo-American cyber defense business Darktrace, network security expert Juniper Networks, networking behemoth Cisco Systems, and cloud security provider Akamai Technologies are among the top ten holdings.
Geographically, the ETF is 71.8% invested in the United States, with 11.3% invested in Israel, 5.6% in the United Kingdom, and 4.8% in Japan. Over the last five years, the fund has provided an annualised return of 11.3% and a three-year return of 7%. However, it has fallen by 27.7% in the last year due to a lack of investor interest in technology equities.
Keep in mind that L&G classifies the fund as a ‘6’ out of 7, with 1 being the lowest risk and 7 being the most. The monthly fee is 0.69%.
Artificial intelligence is a high-risk, yet rapidly developing, business that will be a prominent investment topic over the next decade, including everything from Amazon’s Alexa to sophisticated robots and more mundane areas like online shopping. Fortune Business Insights predicts that the industry will nearly tenfold to $266.9 billion by 2027, from $27.2 billion in 2019.
Investors seeking a diverse approach to this issue may want to consider the Wisdom Tree Artificial Intelligence UCITS ETF. This index follows the NASDAQ CTA Artificial Intelligence Index’s holdings and performance.
Its top ten interests include Pros Holdings, a Texas-based artificial intelligence startup whose software improves retail transactions, Cadence Design Systems, a pioneer in electronic systems design, cyber security provider SentinelOne Inc, and Workday, a cloud-based human resources software provider.
The majority of the fund (91%) is invested in information technology, with 2.43% in consumer discretionary and 2.37% in financials, and it is geographically divided 61% in the United States, 13.4% in Taiwan, and 4.9% in Japan.
The fund is ISA-eligible, with an expense ratio of 0.4%. Since its debut, the fund has returned 37% and 10.4% over three years. However, due to the slump in technology equities, it has lost 37.9% in the last year.
Autonomous and electric vehicles
Electric vehicles (EVs) are an important element of the global greening of transportation. The European Union plans to restrict the sale of new petrol and diesel automobiles by 2035, while California passed similar laws earlier this year. The Global X Autonomous and Electric Vehicles ETF, which tries to mimic the Solactive Autonomous and Electric Vehicles Index, is one pooled approach to access this trend.
The fund, which is worth just under $1 billion, invests in firms working in various aspects of the autonomous car and EV market, such as EV manufacturers, lithium battery producers, and cobalt and lithium producers.
According to its executives, worldwide EV sales will climb by 40% in 2020 but will still account for only 5% of total vehicle sales. Meanwhile, experts believe that self-driving cars might improve road safety.
The ETF presently has 76 holdings, including Tesla, Nvidia, which develops specialty chips, Apple, Intel, Alphabet – Google’s owner – and Pilbara Minerals, situated in Australia, among the top ten. It has a 0.68% expense ratio and a cumulative return of 60.1% from debut in 2018 and 6.7% over two years. However, it is down 24% in a year owing to the panic in IT stocks.
According to Allied Industry Research, the worldwide green technology and sustainability market is expected to be worth $10.32 billion by 2020. It is expected to reach $74.64 billion by 2030, expanding at a compound annual growth rate of 21.9% between 2021 and 2030.
The Lyxor MSCI New Energy ESG Filtered (DR) UCITS ETF invests in worldwide firms involved in renewable energy. It is worth €1.4 billion and follows the MSCI ACWI IMI New Energy ESG Filtered index.
Utilities This is because energy business profits and dividend payouts are largely predictable. It might also be an excellent way to gain from the present high power rates in the UK and Europe, albeit corporations could be punished with windfall taxes.
The SPDR MSCI Europe Utilities UCITS ETF monitors big and medium-sized firms in the European utilities sector, with the MSCI European Utilities 35/20 Capped Index serving as its benchmark. The fund, managed by State Street Global Advisors, has returned 7.8% over five years, 5.6% over three years, and is down 1.25% over one year.
Iberdrola, National Grid, Enel, RWE, and SSE are among its top 10 stock holdings. The fund is now 54% invested in electricity, 27.5% in multi-utilities, and 9% in renewables. The ETF has 25 holdings with a total cost ratio of 0.16%.
With the ongoing turmoil in Ukraine, as well as Russia’s incursion earlier this year, and tensions over Taiwan, several Western nations are raising defense spending. Another industry that is often a safe haven during a recession is the defense sector. Indeed, shares of defence contractor BAE Systems have surged 34% this year due to investor interest.
Rather than acquiring individual shares, an ETF provides a pooled approach to the industry. The SPADE Defense Index, which invests in firms involved in the manufacturing and support of US defense, aerospace, and homeland security activities, is tracked by the Invesco Aerospace and Defence ETF.
Boeing, Northrop Grumman, and Lockheed Martin are among its top ten holdings, as are Raytheon Technologies and General Electric, producers of missile defense systems. The expense ratio is slightly higher than that of other ETFs, at 0.58%, and the performance has been uneven, rising 5.6% over five years, falling 0.67% over three years, and falling 9% in one year.
When circumstances are difficult, the healthcare industry provides investors with some protection. This is due to the fact that demand for healthcare services and medications tends to persist regardless of the situation of the economy. Furthermore, while big pharmaceutical firms may be impacted by greater cost input inflation, they often retain substantial pricing power for their products.
An ETF is one approach to gain exposure to this trend. Blackrock manages the iShares Global Healthcare ETF, which tracks the S&P 1200 healthcare index. It has 114 interests and is worth $4.3 billion. It invests in a variety of medical device, pharmaceutical, and healthcare industries.
UnitedHealth, Pfizer, Eli Lilly, AstraZeneca, Johnson & Johnson, and Novartis are among its top ten holdings. Currently, 64.6% is invested in pharma, biotech, and life sciences, while 33.3% is invested in healthcare equipment and services. The fund has returned 7.64% over five years and 8.69% over three years. However, it is down 8.86% year on year and 2.7% year to date. The cost-to-income ratio is 0.4%.
Smaller firms might be considered hazardous investments since their share values are more volatile and susceptible to news flow and stock market manipulations. They do, however, offer greater growth potential than larger firms and have traditionally delivered higher long-term returns. Despite the fact that a recession is forecast next year, small cap business shares may gain once the stock market recovers.
The WisdomTree Europe SmallCap Dividend UCITS ETF seeks to replicate the price and yield performance of the WisdomTree Europe SmallCap Dividend UCITS Index Euro before fees and costs. It aims to invest in high-quality dividend-paying companies situated in the Eurozone. SSAB, a Nordic steel manufacturer, Telecom Plus, a Danish transportation company, and Quilter, a UK investment management firm, are among its top ten holdings.
Since its launch in 2014, it has returned 7.87% and 3.57% over three years, respectively, while it is down 8.6% over one year owing to general stock market declines. The cost ratio is 0.38%, and the product qualifies for ISAs.