Image source: Getty Images
My Stocks and Shares ISA is fully invested in companies listed on the London Stock Exchange. Although they are from different industries and sectors, and some earn their income globally, my ISA portfolio suffers from country of origin bias. To remedy this, you could invest in stocks that are traded on exchanges in other parts of the world. For starters, how about investing in companies in the world’s largest economy, the US?
There are issues with investing in US stocks within an ISA, or any foreign stock. But luckily, there is a way around those issues and make this a simple endeavor.
The VUSA ETF
i can buy and sell Vanguard S&P 500 ETFs (LSE: VUSA) within my ISA like any other listed in the UK. Passively track the US S&P 500 index. What that means is that if I buy VUSA and the S&P 500 goes up, so will the value of my VUSA holdings. Likewise, if the S&P 500 goes down, my position in VUSA will lose money.
Now, the VUSA stock price will not exactly follow the percentage gain or loss in the S&P 500. This is because the managers of the VUSA ETF extract an ongoing charge of 0.07% as a management fee which reduces the returns, plus tracking might not be perfect.
VUSA managers have to build a portfolio of the 504 US stocks in the S&P 500 in the right proportions to keep track. This is not easy, since the proportions change minute by minute. This is why the tracking may not be perfect and also why they charge an administration fee. And speaking of management fees, VUSA’s is reasonable: it’s not the highest of the S&P 500 tracking options available, nor is it the lowest. And it tracks the S&P 500 with a pretty low margin of error.
S&P 500 Tracking
So why would tracking the S&P 500 help diversify my Stocks and Stocks ISA? Well, as mentioned, it exposes me to trading shares on the exchanges of another country, namely the US. I would get more exposure to the US economy and away from the UK economy.
As I have often lamented, the UK markets, and in particular the FTSE 100 index, falls short on big tech names; in fact, technology in general. This industry has a weight of 2.3% by market value in the Footsie. The S&P 500, by contrast, is heavily skewed towards technology, at 26% in December 2022. The S&P 500 P/E is around 20. The FTSE All-Share Index has a P/E out of 12. So following the US index I would also increase my exposure to growth stocks.
Although technology stocks and growth stocks in general have struggled of late, they have previously posted notable gains. I would like to have exposure to them in the future.
Diversification of Stocks and Stocks ISA
Although my Stocks and Equities ISA is made up entirely of UK-listed equities, my SIPP portfolio has exposure to equities from around the world and other assets as well. I am happy with the diversification of my investment portfolio as a whole. However, if I only had my ISA, I would consider adding VUSA to diversify out of the UK and get that exposure to US big tech growth.
