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

Economic Overview - The U.K. economy experienced volatility in early 2025 but has shown an upward trend since April, with the FTSE 100 up approximately 12% year to date and 5.2% from July to September 24, although it remained flat in September [1] - Following stronger-than-expected growth in the first half of 2025, S&P Global raised the U.K.'s growth projections for the year to 1.2% from 0.9%, with a further expected growth of 1.3% next year [2] Economic Challenges - High unemployment and inflation at 3.8% year on year in August are negatively impacting the U.K.'s economic outlook, with the flash PMI for September indicating a decline in business activity to 51.0, a four-month low [3] - The PMI survey highlighted slowing growth, falling trade, declining business confidence, and continued job losses [3] Inflation and Monetary Policy - The PMI's composite selling prices index suggests that inflation may begin to ease from the current 3.8%, with September's selling price index being the second lowest in 11 months [4] - S&P Global anticipates that the Bank of England (BoE) may adopt a more dovish approach, with expectations of two rate cuts over the next year, likely waiting until the first half of 2026 for further cuts [5] Investment Opportunities - The U.K. government secured £150 billion in U.S. investment through the "Tech Prosperity Deal," aiming to create 7,600 jobs and enhance cooperation in key sectors like AI and quantum computing [7][8] - Major contributions include £90 billion from Blackstone over the next decade, £5 billion from Google for data center expansion, and $30 billion (£22 billion) from Microsoft for AI infrastructure [9][10] ETFs to Consider - iShares MSCI United Kingdom ETF has an asset base of $2.83 billion, a dividend yield of 3.72%, and has gained 4.29% over the past month and 15.49% over the past year [14][15] - Franklin FTSE United Kingdom ETF has an asset base of $837.9 million, a dividend yield of 3.48%, and has gained 3.41% over the past month and 16.69% over the past year [16][17] - First Trust United Kingdom AlphaDEX Fund has an asset base of $71.6 million, a dividend yield of 3.35%, and has gained 3.44% over the past month and 20.35% over the past year [18][19] - iShares MSCI United Kingdom Small-Cap ETF has an asset base of $40.7 million, a dividend yield of 3.78%, and has gained 0.71% over the past month and 7.54% over the past year [20][21]