Best long-term ETFs for UK investors (and retire with £3 million)!

If you just want to invest in the stock market, say with £100 each and every month (called 'dollar cost averaging') automatically taken from your bank account a few days after your pay day, what ETFs should you buy?

US investors, including the famous Warren Buffet, say to just invest in the S&P 500 but UK investors may also want to diversify outside US stocks because we are affected by foreign exchange rates as well as a 15% dividend withholding tax applied to US dividends.

However, US stocks have performed much better than UK or even EU stocks, even allowing for exchange rates and foreign taxes, so we have a difficult decision.

For the main core holdings, I would look at two ETFs:

XDEQ (acc) - This a a quality global ETF, 70% weighted to USA and 40% in Technology incl, Apple, nVidia, Microsoft and Meta. 300 holdings. Note this is not very heavy in Financials but has Visa and Mastercard.

PQVG (distrib) - This contains approx 100 S&P 500 stocks, 95% USA and only 27% in Technology, followed by Financials, Industrials and Consumer Staples. It pays approx 1% dividend.

I would hold these inside a Stocks and Shares ISA and/or a SIPP for tax efficiency.

There is not a great deal of stock overlap between these two ETFs (see table below). XDEQ has shown 25% gain in the last year and PQVG 30%. Note that there will be a small amount of dividend payments from PQVG which you should reinvest. This could help use up the dividend tax free allowance if used outside an ISA or SIPP.

You could put 30% of the monthly £100 into each one, which leaves us with 40% to allocate to other ETFs.

The alternative would be to have a single core world global index ETF such as SWDA\IWDA if you want to have a long-term, broad spectrum portfolio.

Satellite ETFs

The two satellite ETFs I would suggest for good gains are:

IITU (acc)   - S&P 500 Tech - Apple, nVidia, Microsoft, Broadcom, etc. 75% in top 10 companies. 68 holdings.

IUCM (acc) - S&P 500 Communications - Meta, Alphabet, Netflix. 23 Holdings

You could have 20% of each. They are quite volatile however. If you are more cautious, then reduce the proportions as you see fit.

The performance of these is shown below:

The average annual performance of this 4 ETF portfolio over the last 1, 3 and 5 years would have been:

1 Year  =  30%/yr

3 Years = 16%/yr

5 Years = 22%/yr

Assuming 30% XDEQ, 30% PQVG, 20% IITU, 20% IUCM.

So we get around 22%/yr even with the 2020/21 Covid 19 pandemic years.

1 YEAR CHART

5 YEAR CHART

Depending on your risk tolerance, you could adjust the ratios between the four ETFs. The more IITU and IUCM you have, the higher the volatility, risk and potential gain!

Now let's crunch the numbers...

£100/month DCA at 20% gain

So what if you invested £100 a month for five years at 20%? Can you save £100/month without too much sacrifice (e.g. one £3 coffee/drink/snack per day)?

If you currently make monthly contributions to charities, why not invest the money instead and then leave the charities some money in your will instead?

You could easily set up an ISA with Trading 212 for free (zero costs) and configure a 'pie' with these four ETFs which can be paid into regularly and automatically.

The figures below do not allow for increasing the monthly deposit, i.e. it stays the same at £100/month for five years...

and now what if we did this for 30 years...

and what if we did this inside a SIPP where 25% gets added to anything we deposit...

Note that even after 25 years we would only reach £1 million. The most significant gain is made in the last five years which is why it is so important to start young and not withdraw from the accounts (you should also have an emergency fund)! Unfortunately, in real life, little things like kids, buying cars and buying a house tend to take a large toll on our finances along the way, but a couple can contribute twice as much as a single person can and each one can take advantage of individual tax breaks.

Is £3 million (before income tax) enough to retire on in 2054? Let us hope so!

Of course, ideally, you should be increasing the monthly deposits every year to account for inflation and your higher wages. Even if this was just by 1% each year (so in 2025 you deposited £101 each month, in 2026 you deposit £102 each month, etc.), by 2054 you would have £3.056 million in your SIPP!

Note that crystallising (selling) may incur a tax penalty on any gain if sold outside a zero tax account.

Depending on market mood and your judgement, you can also consider one or more satellite ETFs in Finance (IUFS), Energy (IESU), Utilities (IUSU), Gold (SGLN) or even bitcoin/crypto (DAGB).

WARNING: Please do your own research, I am not a financial advisor. These figures are projections and cannot be relied upon for future performance. Government tax regulations are subject to change.