DIY investors plump for passive funds as ISA season swings into gear

Laith Khalaf, head of investment analysis at AJ Bell, comments on the most popular ISA investments bought by DIY investors through AJ Bell in January:

“So far this year investors have been plumping for passive funds in their ISAs, with eight of the ten most popular ISA funds in January being tracker funds or plain vanilla ETFs (see table). The strong start to the year for major stock indices is likely to have driven flows into passive funds, as investors were left scrambling to get money to work in the market. Index trackers are a quick and easy way to get broad market exposure at low cost, and don’t require the additional research required to pick an active fund. They are the satisfying ready meal of the investment world, rather than the more involved Delia dinner party creation.

“Income producing UK companies, as ever, feature heavily in the most bought shares within ISAs. As we plough through a tough economic patch, the heightened value of having one in the hand rather than two in the bush is likely to attract investors to companies that pay regular dividends. Some investors are clearly still going for growth however, with Tesla shares remaining popular, despite the share price more than halving since its peak in 2021. Taking a more positive perspective, shares in the electric car maker are up 80% in 2023 so far. This demonstrates that whatever the end destination for Tesla investors, it’s going to be an extremely bumpy ride.

“The most popular investment trusts chosen by ISA investors in January are bit of a hotchpotch of more conservative funds, income producers, and growth-hungry funds. Like Tesla, Scottish Mortgage retains a loyal following, despite an exceptionally poor 2022. Even taking account of a weak 12 months of performance, the UK’s biggest investment trust has still returned 90% over 5 years, and 420% over 10 years, so it’s easy to see why investors are keeping the faith.

“With an economic downturn beckoning, inflation still riding high, and more interest rate rises in the offing, it remains a rocky time for the stock market. Investors shouldn’t be surprised to see their investments fall in the short term, and need to keep a focus on the longer run returns the stock market can deliver. Those who wish to reduce volatility can invest in more conservative funds, or invest regularly, which helps to smooth the journey.

“The one thing we do know for certain is that higher taxes are encroaching on incomes and investments. Income tax thresholds are already frozen, and cuts to the tax free allowances for capital gains and dividends are arriving from April. Tax shelters like ISAs and SIPPs can help investors to significantly reduce the tax they pay each year, and the rising tax tide means the benefits of doing so have never been so clear.”

Most popular investments with AJ Bell’s DIY investors within ISAs in January 2023: