Investment Trust Dividends

Across the pond.

Investing in the US: your choices and key points to consider

 Dan Coatsworth 

  • Invest with AJ Bell

Investing in the US: your choices and key points to consider

The US is home to the world’s biggest and most successful companies. Investors have made good money over the past decade or so from owning US stocks and funds, and it’s easy to understand why the region remains popular.

It won’t always do well, and there are risks around politics and economics. Yet investors with a long horizon might see merit in keeping part of their portfolio in the US. The big question is how to get exposure.

It’s important to consider your risk appetite when deciding how to invest in the US. A more cautious person might prefer to choose funds as they provide diversified exposure, spreading risks over a portfolio of companies so if something bad happens to one of them, the rest function as a cushion.

More experienced investors may prefer to choose their own stocks or pick certain funds based on their manager’s record. Someone who doesn’t want to spend time selecting investments or monitoring them in the future might prefer the low-cost, straightforward option of a US tracker fund. We’ll now run through the options in more detail.

Investing in the US via actively managed funds

Many investors are happy to pay an ongoing management fee for someone else to do all the hard work, pick stocks and manage a portfolio. Actively managed funds present investors with an opportunity to do better than the market. In the US, that typically means beating the S&P 500, Nasdaq or Dow Jones index.

It’s hard for a fund manager to beat the market year in, year out and eventually most managers will go through periods of underperformance. That’s just the nature of investing. As always, there are some that do better than others.

For example, among the funds that have outperformed, Axa Framlington American Growth has returned 286% over the past 10 years. That beats the 264% return from the S&P 500 index of US shares, according to FE Fundinfo data up to 22 October 2024. Its strategy is to provide long-term capital growth for investors by investing in a fairly concentrated portfolio of approximately 70 US stocks. The fund’s holdings include Apple, Microsoft, Nvidia, UnitedHealth and Booking Holdings.

As another example, CT North American Equity has outperformed the S&P 500 on a five-year basis, returning 114% versus 111% from the index. With circa 110 holdings in the portfolio, the fund has big exposure to technology, consumer products and financials.

Accessing the US market via low-cost passive funds

Investors who want to keep charges as low as possible may prefer to use an ETF or tracker, both of which fall under the category of ‘passive’ funds.

One of the most popular US-focused passive funds with AJ Bell customers is Vanguard S&P 500 ETF. It tracks the S&P 500, which features 500 big companies traded on the US stock market, including Amazon, Johnson & Johnson, McDonald’s, Netflix and Walt Disney. The Vanguard S&P 500 ETF charges 0.07% a year, which is only a fraction of what you might expect to pay for actively managed funds. For example, Axa Framlington American Growth charges 0.81%.

An alternative to ETFs is to buy a tracker fund. These are cheaper to buy and sell but not necessarily cheaper to own. ETFs are classified as shares so you pay £5 to buy and sell. In comparison, trackers are classified as fund, which only cost £1.50 to buy or sell.

L&G US Index Trust is one of the most widely held US tracker funds among AJ Bell customers and has an 0.1% annual management charge. So, it is cheaper to buy, but has a more expensive ongoing charge. L&G US Index tracks the performance of the FTSE USA index, which is a basket of approximately 550 large and medium-sized companies in the US, including iPhone maker Apple, tech giant Microsoft, electric vehicle seller Tesla and weight-loss drug specialist Eli Lilly . These are just two examples of US-focused ETFs and trackers funds; there are more available on the AJ Bell platform.

The main US market indices

There are three main alternative US market indices to the S&P 500 used by ETFs and tracker funds.

The Nasdaq 100 is a basket of 100 of the largest non-financial companies listed on the Nasdaq stock exchange in the US. Nearly two-thirds of the index is made up of technology companies, making Nasdaq 100 ETFs or tracker funds a popular choice for investors seeking tech exposure. You’ll find the world’s best-known tech firms in the index including Apple, Nvidia, Microsoft and Google’s parent company, Alphabet.

The Dow Jones index features 30 big companies from the US stock market including payments group American Express, sporting shoes maker Nike and grocery chain Walmart. Anyone investing in a Dow Jones ETF or tracker fund should recognise that the underlying portfolio is more concentrated than a Nasdaq 100 or S&P 500 fund.

Only tracking 30 names means any setbacks to one or more companies in the portfolio could have a noticeable impact on the overall performance of the Dow Jones ETF or tracker fund. The same principle applies if there is good news lifting one or more holdings. In contrast, the Nasdaq 100 and S&P 500 funds have more holdings and risks are spread more widely.

Another way of getting exposure to the US is to invest in a fund tracking the Russell 2000 index, which is a basket of 2,000 smaller companies.

You aren’t limited to these products. For example, you might wish to invest in US-focused ETFs and tracker funds that target specific styles of companies, such as those which offer high dividend yields or those which possess high earnings growth characteristics.

1 Comment

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