If you are investing from the UK, should you buy British shares, invest in the US stock market or keep things simple with ETFs?
There are good arguments for all three, but the differences matter.
UK shares are generally cheaper by valuation and often offer higher dividend yields, US shares give you access to some of the world’s biggest growth companies and ETFs let you spread your money across hundreds of businesses without having to pick individual winners.
The best option depends on what you want from your investments, but it is worth looking beyond the headlines and comparing what each market offers.
The UK offers cheaper shares and higher dividends
UK shares are often overlooked in favour of the US market, particularly when investors are looking for growth. However, British companies can offer good value, especially when compared with the valuations attached to many large US companies.
The UK market has a strong representation of banks, energy companies, miners, insurers and consumer businesses. Many are established companies that generate substantial cash and pay dividends to shareholders.
For investors looking for income, this can be attractive. UK shares often offer higher dividend yields than US shares, although a high yield can also signal that investors expect trouble ahead. Dividends can be cut, and a falling share price can quickly wipe out several years of income.
The main drawback is that the UK market has fewer large technology companies capable of delivering the growth seen from some of America’s biggest businesses. If you want exposure to companies leading the AI boom or dominating global software markets, the UK has fewer obvious choices.
That does not mean UK shares will always underperform. Paying less for a company’s earnings can improve the potential return if profits hold up and investors eventually place a higher valuation on the business. But cheap shares can remain cheap for years, particularly when growth is limited.
The US offers more growth, but often higher valuations
The US stock market has been home to many of the world’s strongest growth companies. Investors can buy shares in businesses operating across technology, cloud computing, artificial intelligence, healthcare and consumer markets.
Successful companies can grow their earnings for years, expand into new markets and generate substantial cash for shareholders.
The US also has a deeper selection of large, established businesses than most other markets.
The problem is price. US shares often trade at higher valuations than UK shares, meaning investors pay more for each dollar of earnings. This can be justified when companies deliver strong growth, but it also leaves less room for disappointment if profits fall short of expectations.
By comparison, cheaper UK shares may offer better value, particularly for investors looking for dividends or companies trading below their perceived worth.
US stocks can still be worthwhile investments, but buying a great company at an excessive valuation is not necessarily a good deal. The price you pay matters just as much as the quality of the business.
ETFs offer a simpler way to invest
ETFs are worth considering if you would rather invest in the market than spend hours researching individual companies.
An ETF tracking the S&P 500 gives you exposure to around 500 leading US companies through one investment. A global equity ETF can spread your money across companies in the US, UK, Europe, Japan and other markets.
This reduces the risk of relying on a handful of individual shares. If one company performs badly, its impact on a broadly diversified fund is usually limited.
ETFs can also be inexpensive. Broad index funds often have low annual charges, making them useful for investors who want to build a portfolio over many years without paying high management fees.
However, an ETF is not automatically a bargain. An S&P 500 ETF still leaves you heavily exposed to the US market, and its largest holdings can account for a substantial proportion of the fund. A global ETF also tends to have a large US allocation because American companies make up a significant share of global stock market value.
If you buy a specialist ETF focused on one industry, you may end up taking just as much risk as you would by selecting individual shares.
Why not invest in all three?
You do not have to choose one market exclusively.
A global ETF can provide the foundation of a portfolio, while individual UK or US shares can be added if you see opportunities that you believe the wider market is underestimating.
For example, an investor who thinks British companies are undervalued could hold a global ETF alongside selected UK shares. Someone who wants greater exposure to US technology could use an S&P 500 ETF or select individual companies, while accepting the additional concentration risk.
The important point is to understand what you own. Buying a global ETF and then adding several of the same large US companies may leave you more exposed to those businesses than you realise.
What about a Stocks and Shares ISA?
Investors can hold eligible UK shares, overseas shares and ETFs in a Stocks and Shares ISA. Investment income and capital gains within the ISA are generally free from UK tax, subject to the applicable rules.
This can make an ISA a very attractive option for long-term investing. However, dealing fees, foreign exchange charges and fund expenses still affect your returns. US withholding tax may also apply to certain dividends, even when shares are held in an ISA.
The Takeaway
UK shares look attractive when you compare valuations and dividend yields, but a low valuation alone is not enough to make a good investment. US shares offer access to some exceptional businesses, but investors need to consider whether the price already accounts for years of future growth.
For investors who do not want to pick individual companies, a low-cost global ETF is a sensible option to consider. It provides exposure to multiple markets without requiring you to predict which country will outperform.
If you enjoy researching companies, there is nothing wrong with buying individual UK or US shares. Just remember that a great business can be a poor investment at the wrong price.
The choice is not simply between the UK, US or ETFs. It is about finding investments that offer good value and are well balanced.
