US Stocks for UK DIY Investors

I have not been a direct investor in US stocks since the dot-com boom (or rather the bust) in 2000, but there have been significant advances in trading technology since then. I have thought that it might be time to take another look at whether direct investment in US stocks is right for the UK DIY investor.

Then, at the World Money Show last month, I picked up a 73-page booklet from our friends at Stockpedia on US Stocks for UK Investors. So to kill two birds, in this post I will present a few highlights from the booklet that are directly relevant to 7C investors.

Why US Stocks?

The reasons advanced in this section will be familiar:

• international diversification is essential,
  and the US is the world’s largest market
• higher long-term returns (see chart)
• familiarity (of brands, language and culture)
• scale (of sales markets particularly)
• stability (of the economic, business, financial and legal systems)
• dynamism (growth rates of small companies)
• the transparency and liquidity of US markets

To me the question is not whether to invest in the US, it is how? Should we use ETFs, trusts, funds or stocks?

US Exchanges

The booklet runs through the various markets in the US, but for our purposes only the New York Stock Exchange (NYSE) and the NASDAQ are of interest. They have better liquidity and analyst coverage, and are more easily accessed from the UK. NYSE trading hours are from 9.30am to 4pm ET.

The OTC markets and ADRs (US listings of foreign stocks) should not be the first port of call for the UK investor. Similarly, we probably don’t want to buy our US stocks as CDIs (Crest Depositary interests – ADRs in reverse) on the London market.

US Indices

The most famous index is the Dow Jones, but it consists of just 30 stocks and is price- and not market-cap weighted. The S&P (Standard & Poors) 500 is much more useful. S&P also have a mid-cap 400 and small-cap 600, which can be combined with the 500 to make the S&P 900 and the S&P 1500.

Nasdaq has its own Nasdaq 100 and Composite indices (the latter contains almost all the Nasdaq stocks). The Russell 2000 index (owned by the London Stock Exchange) is the best known US small-cap index.

US Company Reporting

US companies report quarterly rather than twice a year as in the UK; most are issued in the two weeks before the end of the calendar quarter (March, June, September, December).  All US company reports are available for free from the SEC’s (Securities & Exchange Commission’s) EDGAR website.

Jargon Busting

The booklet contains a section translating US terms into their UK equivalent. Most of these are straightforward. One significant difference is the definition of small-cap, which in the UK means less than £350M, but in the US runs as high as $2.5bn. The VIX volatility index (or “fear index”) has no direct equal in the UK.

Taxes

One significant point in the US’s favour is that there is no stamp duty on US share purchases. Dividends are not double-taxed (there is a form to fill in outside a SIPP) and are not taxed at all in a SIPP.   Similarly, within a SIPP capital gains are not taxed.

Choosing a broker

Apart from the usual features you’d want to see in a UK broker (online dealing, low commissions), there a few features specific to trading in overseas shares:

1. do they trade in real US shares and not CDIs?
2. do their trading hours match New York and not London?
3.  does the broker offer a multi-currency account
   (or at leasta $ account)?
   • FX fees can be as much as 2% each way on £ accounts
   • $ balances are not allowed in ISAs (but are in SIPPs)
   • a $ account will also simplify the treatment of
     dividends paid in $$

I don’t really want to open a separate SIPP just to trade US stocks, so I will check US dealing charges alongside UK ones in my follow-up post to last week’s initial survey of broker costs.  From Stockopedia’s research, I will add TD direct to the list of five brokers we are already reviewing.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 39 years, with some success.