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If you’re a UK investor interested in adding US stocks to your portfolio, here’s how to go about it.
Why are US stocks worth considering? Because US companies dominate the global stock market, comprising almost 75% of the MSCI World Index, an investing measure that’s valued at over £50 trillion (April 2024). The UK’s presence in the same index is worth about 4%.
The US stock market also plays host to some of the world’s largest and best-known businesses, including Amazon, Apple, Meta (parent company of Facebook, Instagram and WhatsApp) and Microsoft.
Buying shares in any overseas company might seem a little daunting, and when it comes to the US, there’s extra paperwork to contend with and, potentially, extra costs. However, the process is much the same as buying UK stocks and shares.
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
Why invest in the US?
The New York Stock Exchange (NYSE) and its technology-biased cousin, the Nasdaq, have a combined market capitalisation of around $51 trillion, making them the most valuable stock markets in the world.
Investing in companies that trade on these exchanges provides investors with exposure to some of the world’s largest businesses.
Find out more about two influential stock market indices, the S&P 500 and the Dow Jones, that feature many of the largest US companies.
Richard Flynn, managing director of Charles Schwab UK, says: “The advantages of the US market include breadth, liquidity, size and relative performance.”
Investing in the largest and most active markets means the difference between buying and selling prices, known as the ‘spread’, tends to be low. This gives buyers and sellers every chance of finding a suitable counterparty at any time they want to trade.
Jason Hollands, managing director of Bestinvest, puts US equities in the too-big-to-ignore category: “Much of the onward march of US equities in the 21st century is down to the ballooning market capitalisation of US mega-growth stocks such as Apple, Microsoft and, more recently, NVIDIA.”
Flynn adds: “One of the benefits of the sheer size of the US stock market is that it allows for easy diversification across sectors and companies.”
Diversification is used to manage risk and smooth returns. It involves spreading investments across asset classes such as shares, bonds and commodities, as well as different industrial sectors and geographic regions.
Sam North, market analyst at eToro, says: “An entrenched home bias among UK investors can lead to inadequate country and sector diversification, potentially overlooking lucrative opportunities.
“Notably, the UK’s home bias in investing has steadily declined over the past two decades, from 70% 20 years ago to just 30% today, signalling a growing appetite for international investment among British retail investors.
“With advances in technology and decreasing costs, venturing into US markets has become more accessible and affordable for UK investors.”
Flynn adds: “The fact the US dollar is the world’s dominant reserve currency can also be useful to investors into the US, given its relative stability, plus the ability to offer a hedge against global currencies.”
To this point, there are always foreign exchange considerations for a would-be UK investor using pounds sterling to buy (or sell) US shares priced in dollars. But extreme volatility between the two currencies is unusual and this knowledge makes it easier to weigh up the cost of a trade, even taking into account the cost of currency conversion.
There’s also the possibility of additional trading opportunities, with the NYSE recently polling its market participants on the merits of trading stocks around the clock as regulators weigh up an application for the first-ever 24/7 bourse.
What are the potential advantages of investing in the US?
In recent years, US equities have outperformed global markets, leading to higher valuations than their global peers.
Much of this has been driven by the mega-cap technology businesses known as the ‘Magnificent Seven’ – Alphabet (Google’s parent), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Despite recent wobbles, the septet is valued at nearly $13 trillion (April 2024), representing about a third of the value of the S&P 500 stock index. Their collective dominance is an important consideration for investors looking to build a portfolio of global equities.
This is because, historically, major firms with proven earnings and strong balance sheets tend to have the capacity to provide stable, consistent returns.
In addition, because many large European and Asian businesses also list their shares on the US market, investors may find the US provides a convenient route into those companies too.
Bestinvest’s Hollands says: “The US equity market has a markedly different sector make-up compared to the UK. Whereas the biggest sectors in the UK are financials, consumer staples, industrials and energy, the US market has a huge skew toward technology, and online businesses also dominate its communication services and consumer discretionary sectors.”
What are the potential disadvantages of investing in the US?
UK investors looking to buy and sell US stocks need to bear in mind they will be transacting in a different currency compared with any domestic share trades that they might make.
eToro’s Sam North says: “Currency risk looms large. Investing in US stocks exposes UK investors to fluctuations between the pound and the dollar, which can sway investment returns. Platforms offer the flexibility to invest in preferred currencies, offering a partial shield against this risk.”
Hollands says it’s also worth investors understanding the differences between the US market and, say, the UKL “As a ‘growth’ market, there is less emphasis on dividend payouts in the US. So, for income seekers, the US is a less fertile hunting ground. US equities have a forward dividend yield of 1.5% [April 2024], far below bond yields, whereas global equities are yielding 2.1% and UK equities 4.1%.
“Another point to be aware of is that, though there has been a recent sell-off, valuations for parts of the US market have reached quite extended levels of late, particularly in respect of stocks that have benefited from the mania in artificial intelligence.”
Russ Mould, investment director at AJ Bell, says that investors still need to keep their eyes open when investing in the US. “We all know that the US is home to the world’s biggest stock market, bond market and economy, and that being pessimistic on American economic prowess has not been a good bet to take for much of the past 45 years.
“But knowing all this means it is priced into valuations, so care is needed. The US has been a great option since 1980, but there have been lumps and bumps along the way. The US market needs to be approached and researched as dispassionately as any other.”
From a practical point of view, eToro’s North says that time zones between the UK and US also warrant consideration: “Given the usual 5-hour time difference between the UK and US east coast, awareness of market opening and closing times is paramount.
“With the US market typically opening at 1430 UK time and closing at 2100, setting up alerts can facilitate informed and timely decision-making despite the temporal disparity.”
How can a UK investor gain exposure to the US?
UK investors looking to add US exposure to their portfolio have a number of options.
We’ll look in more depth about investing directly into individual US stocks, especially the extra housekeeping concerning tax issues, below.
But for investors who have neither the time, inclination nor expertise to select this route, it’s still possible to gain exposure via different forms of investment fund.
Investment funds carry no guarantees, but they are a popular option for both new and experienced investors. They pool cash from different individuals and use it to buy a range of assets such as stocks and bonds, with any gains or losses shared among investors.
Investment funds are generally considered lower risk than investing in a single company, since they allow investors to diversify their holdings and spread the risk.
There are different types of fund, so it is important for investors to choose ones that best fit with their goals. For example, index tracker and exchange-traded funds aim to reproduce the performance of a stock index such as the US S&P 500 by buying and selling all the shares within it in proportion to the respective sizes – or market capitalisation – of each company concerned.
These ‘passive’ funds, which are run by computers, differ from ‘active’ funds, where a management team tries to produce a superior return by picking companies they think have the most potential.
How can I buy investment funds or shares in US companies?
The most popular way is to do so via an online investing platform, also known as a brokerage, or via an investment trading app. Some platforms offer an app as part of their trading offering, while other providers may be app-only.
Exactly which investments you are able to make varies from one provider to another. Some offer access to thousands of funds and shares while others are more restrictive.
We’ve covered investing platforms extensively, including our pick of the best online brokers and trading apps, which each provide an in-depth look at what investors can expect to pay for these services.
The process of opening an online account is different from one provider to another. But it usually involves providing personal details such as your name, date of birth, address, and possibly your National Insurance number, before funding the account via a bank transfer, debit card transaction or other payment option.
Depending on the provider in question, the whole process can take anything from a few hours to a day or two to complete.
Once an account has been opened successfully, would-be investors can log into their accounts at any time to view investments and buy or sell assets.
Outside of stock exchange opening hours, it is possible to leave a ‘buy’ or ‘sell’ order which kicks into action at the start of the next trading day. Trading instructions can also be arranged according to a pre-stipulated buy or sell price.
What do I need to remember when investing in US shares?
Once you’ve opened an investing account, the physical process of buying US shares is no different to purchasing UK ones.
But if you decide to invest in foreign companies, such as US shares, you might pay higher trading or other administrative fees than you would when buying their UK equivalents. That said, some brokers (see below) offer fee-free trading to UK investors looking to buy US shares.
Bear in mind that, where promoted, fee-free trading doesn’t necessarily mean the overall cost of a transaction to an account holder is zero. Providers use other means, such as currency conversion fees, to make their money from customers.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
eToro’s North says: “For UK residents dabbling in US stocks and shares, navigating the tax landscape of both jurisdictions is imperative. Depending on residency status, investment type, and earned income, investors may find themselves subject to taxes in both the US and the UK on their investment gains.
“A thorough understanding of tax rules in each jurisdiction is indispensable to sidestep unforeseen tax liabilities and optimise tax efficiency, which means investors should seek professional tax advice when needed.”
If you buy shares in a US company, you will also be asked to fill in a W-8 BEN form. This allows investors to claim a tax discount on any dividends or interest they earn from holding US shares.
The trading platform IG tells its customers: “As part of the requirement for buying US shares, you must complete a W-8 BEN form. This condition is stipulated by the American Internal Revenue Service [ US equivalent of HM Revenue & Customs]. The purpose of the form is to confirm that you’re not a US resident.”
Filling-in the form offers clients a reduction of up to 30% in the amount of US tax they are charged on dividends from the US shares they buy. Once submitted, the form is valid for three years. Your provider should remind you when it is about to expire.
Richard Flynn, managing director of Charles Schwab UK, says: “We require an account to be fully certified with a W-8 BEN prior to the account being able to trade. If a W-8 BEN certification lapses, for example the investor fails to re-certify at the three-year stage, then the account is internally coded accordingly.
“While this doesn’t necessarily restrict the account from placing trades, the practical implications are significant. Without a valid W-8 BEN on file, an account is coded to apply what is called Federal Backup Withholding. When an account is in this status, the US imposes a 24% tax on interest, dividends, option contract sales, and gross sales proceeds.
“Once the IRS takes this withholding, if there is a delay in recertification it can take some time for a non-US person to attempt to claim it back from them directly.”
Which are the best platforms to invest in the US?
A growing number of providers offer UK investors the option to buy US shares, making the market increasingly competitive. This list of companies have previously scored highly in other Forbes Advisor UK pieces, along with several additional names which specialise in offering US share-dealing to UK customers.
eToro offers access to a range of US stocks, applies no charge for either trading or platform fees, and offers trading tools such as stop losses, limit orders and leveraged trading. It also has ‘social’ and ‘copy’ trading options to allow beginners to interact with more experienced investors.
Saxo Bank’s trading account is available to customers in the UK. With over 20,000 assets on offer across multiple stock exchanges, the platform offers more investment options than most.
Trading 212 offers commission-free trading and low foreign exchange fees. But with comparatively little on offer in the way of research, it may be an option for those who feel confident picking their own investments.
Bestinvest users need to weigh up the lack of trading fees on funds and US shares, combined with a relatively low platform fee, against the relatively high foreign exchange costs.
interactive investor is one of the UK’s larger investing platforms and tends to be a good choice for traders looking for a low-cost platform with a wide choice of investments.
Charles Schwab offers commission-free trading online and provides both excellent research tools and customer support.
Webull offers low commissions, no platform fees and access to 10,000+ stocks on the NYSE, Nasdaq, and NYSE American exchange focused on smaller company stocks.
Interactive Brokers has low trading fees, a wide range of products and good research tools.
Robinhood is a relatively recent entry to the UK market offering access to 6,000 US stocks with trades that are free from both commission and foreign exchange fees.
