Investors are falling back in love with some parts of the UK market

Investors are selectively buying back into the UK stock market, and AJ Bell DIY Investors are part of the trend.

Data from Calastone’s Fund Flow Index found that on the whole, retail investors have UK-focused funds on their sell lists, with £708 million withdrawn in September. However, when we break it down by market value, there are green shoots of positive sentiment.

UK large-cap ETFs (exchange-traded funds) have attracted $3.38 billion in estimated net inflows in 2026, their strongest annual total since 2020, according to Morningstar data.

Morningstar analyst Michael Born notes that higher defence spending from governments, a bull cycle in commodity prices and a rerating of banks and insurers have been key market drivers since 2022 and the UK market is “naturally exposed to many of themes”.

Energy accounts for around 11% of the FTSE 100, meanwhile Banks make up almost 20% and Industrial Goods and Services – which encompasses defence stocks – another 12%.

The FTSE 100’s higher weighting to these more cyclical sectors has help propelled it to outperform the MSCI World index over the past five years, in sterling terms, making almost 78% versus 73.5%.

These same characteristics are partly what has kept investors away from the UK for the better part of a decade though, as they sought out more tech exposure, an area which only accounts for 2.3% of the FTSE 100.

Another reason investors have been buying the UK is to act as a hedge against the more AI and tech-heavy US and emerging markets, as investors grow increasingly anxious about the sustainability of AI spending.

Most of the UK inflows have gone into market-cap-weighted trackers, “meaning investors are backing many of the companies that have led the UK market's recovery, including HSBC, Shell and Rolls-Royce”, Born says.

This is where the majority of money from AJ Bell’s DIY investors has gone when buying exposure to the FTSE 100.

Since the start of the year, investors have been buying into UK equities but have been doing so selectively.

The primary way is via tracker funds, in particular the Vanguard FTSE 100 ETF, iShares UK Equity Index (UK) D Acc, HSBC UK FTSE 100 ETF, the HSBC UK FTSE All Share Index ETF, Vanguard FTSE UK All Share Index and the iShares 100 UK Equity Index Acc.

The funds track a mixture of either just the FTSE 100, giving ‘purer’ large-cap exposure, or the FTSE All-Share index, which gives an aggregation of the large, mid and smaller companies listed on the London Stock Exchange.

Like most indices, the FTSE All Share is market cap weighted, meaning that the bigger companies have a great representation in the market and therefore impact the performance more. So, while an ETF or fund may cover the broader FTSE All Share, a majority of the returns end up coming from the FTSE 100 names.

Investors buying ETFs points to a preference for broad, low-cost UK market exposure, rather than investors trying to make narrow sector or stock-selection calls.

But there has been some appetite for active funds, specifically Fidelity Special Situations, Artemis SmartGARP UK Equity and Man Income, the latter one of AJ Bell’s Favourite funds.

All of these funds are benchmarked to the FTSE All Share, meaning that they can invest in large, medium and smaller companies, but they all have a higher proportion of FTSE 100 names at present.

Alongside a possible ‘anti-AI’ trade, the presence of income funds suggests that investors are still seeking out the UK for its well-known dividend paying qualities alongside looking to grow the value of their investments.

This doesn’t mean that the tables have totally turned on the UK among retail investors. While some FTSE-focused funds have been popular so far this year, the majority of money has been going into global and US-focused funds overall.