Should You Add More U.K. ETFs to Your Portfolio Now?

The FTSE 100 kicked off 2026 on a strong note, building steady upward momentum. U.K.’s benchmark index has risen 7.69% so far this year and 22.75% over the past year, outperforming its transatlantic peer. In contrast, the S&P 500 is slightly in negative territory so far this year, down about 0.24%, though it remains up 12.16% over the past year.

Rising geopolitical tensions since the start of the year, coupled with heightened U.S. market volatility driven by AI-related concerns, have prompted investors to reassess their U.S. exposure and rotate away from American securities. 

The so-called “AI scare” trade shows little sign of easing, as investor anxiety around AI-driven disruption continues to build. With the majority of the S&P 500 allocated to the information technology sector, the index carries significant concentration risk. The tech rout and rising anxiety around AI-driven disruption have made this concentration risk increasingly evident, prompting investors to rotate away from U.S. securities.

Sector Tilt Favors the FTSE 100?

According to Reuters, with its heavier weighting toward banks and mining stocks, coupled with limited exposure to big tech and AI-driven names, the FTSE 100 has emerged as a relative beneficiary, supporting its outperformance versus the S&P 500.

According to the abovementioned Reuters article, U.K. large caps still trade at an approximately 40% valuation discount relative to U.S. equities. Additionally, valuations for U.K. banks remain compelling relative to U.S. peers, while the country’s mining majors stand to gain from firm precious metals prices and structurally rising copper demand.

Economic Momentum Builds Across the U.K.

The preliminary February reading of the S&P Global U.K. Composite PMI climbed to 53.9 from 53.7 in January,  the strongest level since April 2024, marking British businesses’ continued momentum, which has now stretched into the second month, according to Reuters. A PMI reading above 50 signals growth in economic activity.

As per another Reuters article, U.K. retail sales posted their strongest annual gain in almost four years in January, with volumes rising 4.5% year over year, marking the strongest increase since February 2022 and increasing 1.8% from December.

Official figures indicated that the U.K. recorded a £30.4 billion ($40.9 billion) budget surplus in January 2026, as quoted on CNBC, marking a significant improvement from a year earlier. Cumulative borrowing for the fiscal year to date stands at £112.1 billion, 11.5% lower year over year.

Falling Inflation Fuels Rate Cut Optimism

According to Office for National Statistics, as quoted on a Reuters article, U.K. inflation eased to its lowest level since March 2025, reinforcing expectations that the Bank of England (BoE) could move toward an interest rate cut in the near term. Inflation slowed to 3.0% annually in January, marking a notable step down from December’s 3.4% reading.

Per the abovementioned Reuters article, following the inflation data, markets raised their expectations for policy easing, with interest rate futures now pricing in nearly a 90% probability of a March rate cut by the BoE. The expectations have increased compared with roughly 80% before the data, with another move anticipated in late 2026.

The softer inflation data and rising expectations of a Bank of England rate cut were well received by investors.

ETFs to Consider

Investors can increase their portfolio exposure to the U.K. with the following pure-play U.K. ETFs: iShares MSCI United Kingdom ETF EWU, Franklin FTSE United Kingdom ETF FLGB, First Trust United Kingdom AlphaDEX Fund FKU and iShares MSCI United Kingdom Small-Cap ETF EWUS.

Investors can consider the following ETFs for a more diversified exposure to the U.K. economy.

iShares MSCI Europe Small-Cap ETF IEUS has 28.37% exposure to the U.K.

iShares Core MSCI Europe ETF IEUR has an exposure of 23.15% to the U.K.

iShares Europe ETF IEV has an exposure of 23.64% to the U.K.

Vanguard FTSE Europe ETF VGK has 23.20% exposure to the U.K.

iShares International Select Dividend ETF IDV has 20.51% exposure to the U.K.

iShares MSCI Europe Financials ETF EUFN has 23.89% exposure to the U.K. but a concentrated exposure to financials.

iShares MSCI Global Metals & Mining Producers ETF PICK has 16.38% exposure to the U.K. but a concentrated exposure to metals and mining.

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This article originally published on Zacks Investment Research (zacks.com).

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