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Investing in the US – right on track

After interest rates fell last week, we take a look at the US stock market.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The US stock market is hard to ignore. It makes up around half of the global stock market and often dictates what happens in the rest of the investing world. It’s chock full of famous brands and global titans, as well as companies from a huge variety of sectors. On the face of it, it’s an investor’s paradise.

However, as lots of fund managers have found out, it’s also a very difficult market to beat. In fact, most actively managed US funds don’t perform as well as the broader US stock market. In turn, we’ve struggled to find many compelling funds for the Wealth 50’s North America sector.

We did some research looking at all currently active funds in the IA North America sector with at least a 10 year track record. Over the 10 years to 31 August 2019 just 7% did better than the FTSE USA.

By comparison, using the same assumptions here in the UK, more than half of currently active funds outperformed the FTSE All-Share index. Remember past performance isn’t a guide to the future.

So what it is about the US market that makes it so difficult for fund managers to outperform?

Stock markets are incredibly complex, so it’s nearly impossible to answer this definitively. But one argument is the US market is the most intensively analysed, making it extremely difficult to spot overlooked opportunities – also known as an efficient market.

Whatever the reasons, there’s a way you can invest in the US stock market and do better than most active fund managers have done.

If you’re not sure if an investment’s right for you, please ask for personal advice. All investments can fall as well as rise in value so you might not get back what you invest.

If you can’t beat 'em

We think passive funds are a great way to invest in the US stock market. Instead of trying to beat the market, tracker funds aim to copy the performance of an index. They normally do this by investing in the same companies and in the same proportions as the index.

As they don’t rely on fund managers or teams of analysts, they keep costs low. Costs eat into performance, so the lower the costs the better the fund is able to mirror the index.

By investing in the entire index, you’ll also benefit from plenty of diversification. We think tracker funds are a simple, convenient and low cost option to invest in hundreds of great American companies.

There are a couple of things to be consider though.

The performance of a US tracker fund will match the ups and downs of the US stock market. That’s great when it’s going up, but when the market drops the fund will go down with it. Active managers can position a fund to potentially do better in a downturn, although there’s no guarantee they will.

As tracker funds own companies in the same proportion as the index, they’ll naturally have more money invested in the largest companies. If you like to have more invested in smaller companies, you might want to supplement them with a US smaller companies fund.

Legal & General US index

Our favourite option for investing in a broad range of US companies is the Legal & General US Index Fund. It tracks the FTSE USA index by investing in over 600 of the biggest American companies, including Microsoft, Apple and Amazon. Technology companies make up more of the fund than any other industry. There’s still plenty of diversification offered by the other sectors the fund invests in, such as healthcare, retail, energy and financial services.

Legal & General is one of the biggest providers of passive investments in the UK. They use their scale and expertise to keep costs low, so the fund can track the index as closely as possible. It’s available through HL for an ongoing charge of 0.06%, plus the HL platform fee of up to 0.45%.

More on this fund including charges


Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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