As the Brexit crisis continues, UK investors may be wondering if there is anything they can do to protect their portfolio.
Here's the short answer: diversify your portfolio away from UK stocks. In fact, that's always good advice regardless of the political and economic situation in Britain. You should never have all your eggs in one basket.
There are a couple of problems though. Firstly, the pound has fallen a fair bit in recent months - it's trading at $1.26 at the time of writing - and that makes overseas investments more expensive. Your pound doesn't buy as many shares in New York or Tokyo as would normally be the case.
Secondly, UK shares are relatively cheap. Lots of Brexit bad news is already 'priced in' to UK shares. So if the UK government does manage to agree a decent Brexit deal with the EU, UK shares could move up. The same is true if a 'no-deal Brexit' doesn't prove to be as scary as many currently expect. The pound could rise quickly too.
On the other hand, a 'no-deal Brexit' that proved to be massively disruptive would push UK share prices down further.
My view is that if your portfolio is heavily weighted towards the UK, you should diversify. That means buying non-UK shares and perhaps investing in commodities too. Here are six ETFs that could help you do that.
1. Vanguard FTSE All-World UCITS ETF (VWRL)
A global ETF is the easiest way to diversify.
This ETF tracks the FTSE All-World index which means investors get exposure to 90-95% of the global stock market.
The ongoing charge is reasonable at 0.25% although there are cheaper global equities ETFs available. However, those cheaper funds track the narrower MSCI World index which doesn't include many emerging market stocks. Given that emerging market economies are likely to deliver the fastest economic growth over the next decade, it seems silly not to get some exposure to emerging market shares.
Even with the emerging market stocks in the index, around 50% of the ETF's value is in US-listed stocks while around 8% is in Japanese stocks. UK-listed stocks make up another 8% or so of the fund.
There are around 3100 stocks in the ETF and financial services is the largest sector, with an 18% to 20% weighting, followed by information technology with around 14%.
You might think it better to go for a global ETF that doesn't include UK-listed stocks but there are only a couple of global ex-UK ETFs out there and their charges are higher. For example, the Xtrackers FTSE All-World ex UK ETF (XDEX) has an 0.4% ongoing charge.
2. iShares MSCI World GBP Hedged UCITS ETF (IGWD)
Given that the pound is pretty weak, investing in a hedged ETF might be a good move. Then you won't lose out if the pound gains a lot from here. You do have to pay for the hedge though. This particular hedged ETF charges 0.55% a year.
Also note that this ETF tracks the MSCI World index which doesn't include any emerging markets stocks. That means US stocks comprise about 62% of the fund.
3. iShares Edge MSCI World Size Factor UCITS ETF (IWSZ)
A factor-based approach is another way to diversify. This ETF tracks smaller companies across 23 countries. 36% of the fund is invested in the US, with 20% in Japan. There are approximately 900 stocks in the ETF and when the fund is rebalanced every six months, every stock is given the same weighting. This means that the ETF effectively sells down the shares that are rising in price whilst buying the ones that are getting cheaper.
4. iShares Core MSCI Japan IMI UCITS ETF (SJPA)
Geographical diversification is also a good idea and Japan is a great place to start. The country's shares have had a good run in the last couple of years - the Nikkei 225 is up 30% over that time - but there's room for more growth to come. Prime Minister Shinzo Abe has pushed through some much-needed economic reforms, not the least of which has been a change in corporate culture. Company boards are now more responsive to the needs of shareholders and are willing to pay bigger dividends as well as carry out share buybacks.
The iShares Core MSCI Japan IMI UCITS ETF (SJPA) gives you good broad exposure to the Japanese market. The MSCI Japan IMI index covers around 1200 Japanese companies and represents around 99% of the Japanese stock market. The ongoing charge is just 0.2% which means this is a cheap way to invest in Japanese stocks.
Gold and commodities
5.ETFS Physical Gold (PHGP)
If you're gloomy about the wider outlook beyond the UK, you may want to put some money into Gold. In fact, even if you're pretty upbeat about the global economy, there's a good argument for investing some of your portfolio in gold as it often provides a good insurance policy against inflation or any market turbulence.
This product is an exchange traded commodity (ETC) rather than an exchange traded fund, but without getting hung up on the technicalities, it's a cheap and simple way to invest in gold. The ongoing charge is 0.39%.
6. ETFS All Commodities ETC (AIGC)
A broader commodities fund is another way to diversify your portfolio and commodities often perform well in an environment where inflation is on the up. This ETC tracks the Bloomberg Commodities Index and has an 0.49% fee.
UK's international stock market
It's worth remembering that many UK-listed stocks are big global businesses that generate a lot of their revenue away from the UK. So although I think it's important not to have all your eggs in the UK market 'basket', you don't need to move them all. If you own individual UK stocks, go on their websites and find out how much money they make away from the UK. That may reassure you somewhat.
And my final point is that no one knows for sure how Brexit will pan out. I'm fairly pessimistic but I may be proven wrong. By having a diverse portfolio, you'll be well placed to cope with most scenarios.
For more ETF ideas, check out four top emerging markets ETFs and five top Europe ETFs.
This article was originally published in February 2018. It was revised and updated in December 2018.