Should Investors Increase Their Allocation to U.K. ETFs Now?

Like many global economies, the U.K. experienced volatility in the first three months of 2025 but since reversing course in early April, it has been on an upward trend. The FTSE 100 is up about 12% year to date and 5.2% from July till Sept. 24, though it has remained flat throughout September.

Following stronger-than-expected growth in the first half of 2025, the U.K. economy is now expected to slow down in the second half of the year. The economy’s first-half performance led S&P Global to raise its growth projections for the year to 1.2% from 0.9%, while projecting a steady uptick next year with growth expected at 1.3%.

Signs of a Potential Economic Turnaround?

High unemployment and inflation, which was up 3.8% year on year in August, are dragging down the U.K.’s economic outlook, according to S&P Global.

Per the U.K. flash PMI survey for the month of September, U.K. business activity lost momentum in the month, with the PMI slipping to 51.0, a four-month low, from 53.5 in August. The U.K. PMI survey highlighted slowing growth, falling trade, declining business confidence and continued steep job losses.

However, the PMI's composite selling prices index suggests inflation could begin easing from the current 3.8% in the coming period. September’s PMI selling price index was the second lowest in 11 months and among the lowest since the pandemic.

Additionally, September’s flash PMI data indicate policymakers could adopt a more dovish approach in future meetings. Per S&P Global, the Bank of England (BoE) is expected to deliver two rate cuts over the next year, likely waiting until the first half of 2026 for further rate cuts.

Per KPMG, price levels are anticipated to climb to 4% in the near term and remain elevated throughout 2025, before gradually declining from early next year to reach the BoE’s target level of 2% by mid-2026. KPMG also forecasts another rate cut before year-end, with more gradual reductions from 2026, potentially bringing it to 3.25% over the medium term.

Can the Transatlantic Deal Give the Markets a Boost?

Following President Trump’s recent visit, the U.K. government announced it has secured £150 billion in U.S. investment, under the newly signed “Tech Prosperity Deal” between the U.S. and the U.K., as quoted on BBC.

The U.K. aims for the deal to generate 7,600 jobs and strengthen cooperation in key areas such as artificial intelligence, quantum computing and nuclear power between the transatlantic partners, as companies including Microsoft and Google have pledged to invest billions in the region.

Per BBC, the bulk of the investment, about £90 billion, will come from Blackstone over the next decade, in addition to the £10 billion earlier pledged by the private equity giant, while Google will contribute £5 billion over two years to expand an existing data center.

Additionally, Microsoft MSFT plans to invest $30 billion (£22 billion) over four years to strengthen AI infrastructure and support ongoing operations, with Prologis PLD committing investments of £3.9 billion alongside £1.5 billion from Palantir PLTR, according to Yahoo Finance.

According to Prime Minister Keir Starmer, as quoted in the BBC article, these investments highlight Britain’s economic resilience, as Starmer aims to position the U.K. as a top destination for U.S. investment to support economic growth.

ETFs to Consider

While current economic data may not fully support higher exposure to the U.K., optimism around expectations of easing inflationary pressures and the U.S.-U.K. deal could justify boosting portfolio allocation to the economy.

However, investors should keep a close eye on ongoing developments, as increasing exposure to the U.K. economy carries risks but the potential rewards could be worth it.

Investors can increase their portfolio exposure to the U.K. with the following pure-play U.K. ETFs.

iShares MSCI United Kingdom ETF EWU

iShares MSCI United Kingdom ETF seeks to track the performance of MSCI United Kingdom Index with a basket of 74 securities. The fund has amassed an asset base of $2.83 billion and charges an annual fee of 0.50%.

EWU has a dividend yield of 3.72% and a double-digit exposure to financials, consumer staples, industrials, health care and energy sectors.

iShares MSCI United Kingdom ETF has gained 4.29% over the past month and 15.49% over the past year.

Franklin FTSE United Kingdom ETF FLGB

Franklin FTSE United Kingdom ETF seeks to track the performance of FTSE UK RIC Capped Index with a basket of 98 securities. The fund has amassed an asset base of $837.9 million and charges an annual fee of 0.09%.

FLGB has a dividend yield of 3.48% and has top allocations to financials, industrials, consumer staples, health care and energy sectors.

Franklin FTSE United Kingdom ETF has gained 3.41% over the past month and 16.69% over the past year.

First Trust United Kingdom AlphaDEX Fund FKU

First Trust United Kingdom AlphaDEX Fund seeks to track the performance of NASDAQ AlphaDEX United Kingdom Index with a basket of 76 securities. The fund has amassed an asset base of $71.6 million and charges an annual fee of 0.80%.

FKU has a dividend yield of 3.35% and has double-digit exposure to financials, industrials, consumer staples and materials sectors.

First Trust United Kingdom AlphaDEX Fund has gained 3.44% over the past month and 20.35% over the past year.

iShares MSCI United Kingdom Small-Cap ETF EWUS

iShares MSCI United Kingdom Small-Cap ETF seeks to track the performance of MSCI United Kingdom Small Cap Index with a basket of 205 securities. The fund has amassed an asset base of $40.7 million and charges an annual fee of 0.59%.

EWUS has a dividend yield of 3.78% and has double-digit exposure to financials, industrials, consumer staples and real estate sectors.

iShares MSCI United Kingdom Small-Cap ETF has gained 0.71% over the past month and 7.54% over the past year.

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