The low-cost way to invest in the US

Investing in the US needn’t be complicated nor expensive. There are certain types of funds that follow specific parts of the US stock market and their charges are typically low compared to actively managed funds.

Pop one of these in your ISA or pension and the investment will do the same as whatever’s happening in the US market you’re tracking.

Putting money into one of these funds would provide exposure to companies in America. For some people, that’s all they want. They don’t want to pay a fund manager to beat the market; they’re happy just going with the flow, particularly if it means paying a low annual fee.

After all, 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.

Active vs passive funds – what does this mean?

Funds that use a real person to pick the individual holdings are called ‘active’. Those that simply track the performance of an index are called ‘passive’, and it’s the latter that can offer the cheapest and simplest exposure to the market.

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 index, which is a basket of 500 big companies traded on the US stock market. The basket includes Amazon, Johnson & Johnson, McDonald’s, Netflix and Walt Disney.

What is an ETF?

The term ‘ETF’ stands for ‘Exchange-Traded Fund’. You buy shares in the ETF on the stock market and its price will change throughout the day to reflect the market value of its underlying holdings. If the S&P 500 index goes up by 5% in a week, so will the Vanguard S&P 500 ETF. Long-term performance figures might show the ETF slightly lagging the index, which simply reflects the charges applied to the fund. Performance figures are typically quoted after fund charges are deducted.

For example, the Vanguard S&P 500 ETF charges 0.07% a year. That means if you invested £500 in the ETF, Vanguard would keep 35p a year. If the value of your investment goes up, naturally the 0.07% management charge would add up to a bigger number – and less if the investment fell in value.

There are many other ETFs tracking the S&P 500 index and charges will vary from provider to provider. You also have to factor in the cost of buying the shares and the platform charges you’ll pay.

What’s the difference between a tracker fund and an ETF?

Tracker funds are similar to ETFs in that costs are typically low and they mirror the performance of a specific index. However, they are only valued once a day. They fall under the category of funds rather than shares, which means they only cost £1.50 to buy or sell with AJ Bell.

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. It tracks the performance of the FTSE USA index, which is a basket of approximately 550 large and medium-sized companies in the US including Apple, Microsoft, Tesla and Eli Lilly.

Other ways to get US exposure

There are three main alternative US market indices to the S&P 500 that are used by many low-cost 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 many of 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 American Express, Nike and Walmart. Anyone investing in a Dow Jones ETF or tracker fund should recognise that the underlying portfolio has fewer holdings and so 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 so the risks are spread more widely.

The other popular 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.

How AJ Bell can help you look for certain types of funds

AJ Bell’s fund screener can help you to narrow down the selection. Click the ‘Sector’ button and tick ‘North America’ and/or ‘North American Smaller Companies’, and then click ‘Management style’ and select ‘Passive’. Clicking the ‘More filters’ tab will let you narrow the list even further if you specifically want income or growth styles.

You can also use the filtering system to see which US-focused products appear on AJ Bell’s list of Favourite funds. These have been selected by our investment specialists for offering value to investors, among other characteristics. The AJ Bell Favourite funds list is designed to help you choose your investments but isn’t a personal recommendation.