US equity markets performed particularly strongly over the five years to end-July 2017, with the S&P 500 rising 136.6% compared with an 83.9% gain for the MSCI World ex US index. On valuation grounds, many investors would say that the US is looking too expensive with a historic earnings multiple of 21 times. However, other investors point to technology (which now accounts for 23% of the S&P 500) and still see enormous growth prospects for those companies. Read more on investing in the US tech giants.
While it would be surprising if the US continued to outperform to this magnitude over the next five years, we still believe that the US markets warrant a significant place in an investor’s portfolio due to the prevalence of existing high quality businesses and the trend towards global technology-focused companies choosing to list in the US rather than on other international exchanges.
One element to consider, for sterling investors, is whether the returns generated by a weakening pound will reverse over the next few years. For example, in 2016 the S&P 500 was up by 12.0% in USD but a huge 33.6% in GBP terms. Currency hedged ETFs will protect against such a scenario.
As the ETF market has matured, in recent years a number of global ETFs have come to the market offering small and mid-cap exposure, or factor exposures, such as size, momentum and value. These can be a valuable addition to an investor’s tool kit, and we include a couple of these.
Many US ETFs will outperform their benchmarks
Firstly, one noteworthy quirk of investing in US ETFs is that they often outperform their benchmarks on a net of fees basis. This is because Irish domiciled ETFs (which are still London listed) have a favourable dividend withholding tax treatment, meaning that the index providers which report indices net of US withholding tax factor in a higher tax charge than the ETF incurs. For example Source, iShares and db x trackers, to name just three providers, all have S&P 500 ETFs which have outperformed the S&P 500 Total Return (Net) Index.
Use our ETF screener to research the right US ETFs for you. All the ETFs described below can be bought on IG’s share dealing platform, where commissions start at just £5 and there are no custody or platform fees.
iShares Core S&P 500 (CSP1)
In a very competitive market, there is little to choose between the S&P 500 ETFs. With fees of just 0.07%, a bid-ask spread of 0.04% and outperformance of benchmark of 2.1% over the past five years, this a solid choice to get market cap index exposure to the US. It re-invests its dividends, which should also help lower transaction cost for long-term holders.
iShares S&P 500 GBP Hedged (IGUS)
With sterling looking cheap compared with recent history, having some GBP-hedged exposure to the US to protect portfolios against a possible weakening of the dollar is becoming more popular. iShares S&P 500 GBP Hedged recently lowered its TER to 0.2%, making it a low cost way to get this exposure.
SPDR Russell 2000 US Small Cap (R2SC)
The Russell 2000 was a great beneficiary of the post US election Trump trade, but it is now one of the most expensive parts of the US market, trading at around 30x historic earnings. Nevertheless, this ETF provides low cost exposure to the majority of this index with a TER of 0.3%.
PowerShares EQQQ NASDAQ-100 (0.3%)
Technology now accounts for 23% of the S&P 500, but PowerShares EQQQ NASDAQ-100 (0.3% TER) is attractive for those wanting a purer exposure. The top holdings are quite concentrated, with Apple, Microsoft, Amazon, Facebook and Alphabet (previously known as Google) accounting for 43% of the index. The ETF is very liquid and trades with a tight average bid-ask spread of just 0.07%.
SPDR S&P US Dividend Aristocrats (USDV)
This ETF tracks members of the S&P Composite 1500 Index that have increased their dividend for at least 20 years, meaning it is investing in established businesses rather than those with the highest yield. It therefore has a huge underweight to technology, with only a 2.5% position. It has a Total Expense Ratio of 0.35%.
iShares US Equity Buyback Achievers (BACS)
Amid the smart beta ETFs offering value, momentum and size tilts, this ETF stands out as offering something totally different. It focuses on stocks which have bought back more than 5% of their share capital in the previous 12 months (therefore boosting earnings per share), many of which have shareholder activists pushing for change. It is more volatile than a market cap index, but the high tracking error shows that it genuinely offers a different return profile. The TER is 0.55%.
Read the rest of our six of the best ETFs series: