It is the biggest, most liquid stock market in the world, offers huge diversification, access to top innovation, and all under the watchful eye of strict governance rules to protect investors.

That there should be a place in every UK investor’s portfolio for US equities is to bang a well-worn drum and such is the market cap might of the US’s largest companies, even world index ETFs will provide significant US exposure.

WHY YOU NEED US EXPOSURE

There are several reasons to consider having specific exposure to US stocks right now. First, no market benefits more from AI (artificial intelligence) than the US – it has got the planet’s biggest tech industry and is the centre of AI innovation. Labour markets have been tight across the world and AI can significantly boost productivity and lower costs. In simple terms, it can really rev up the profitability of US companies.

Analysts at Goldman Sachs estimate that AI could jack up US productivity by 1.5% annually, translating into an extra 1.1% in economic growth every year for a decade.

With the risk of a global growth slowdown, it makes sense to load up on companies with more defensive and structural growth drivers. Compared to its peers, the US stock market has less exposure to recession-vulnerable industrials and basic material firms, and a heavy exposure to technology companies, whose revenues and profits often hold up better in tough times.

Low-cost exchange-traded funds are an obvious way to do it. There are any number of ETFs that will track the US stock market in general terms, or the major indices – the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, Nasdaq 100, and even the Russell 2000, the main smaller cap index stateside.

Vanguard FTSE North America ETF (VNRG) is one of the cheapest routes into the US equity market, tracking an all-encompassing collection of 640-odd US and Canadian stocks with an ongoing charge of 0.1%.

Index tracking ETFs are great for low-cost exposure to mainstream stocks, like Apple (AAPL:NASDAQ), Coca-Cola (KO:NYSE) or Tesla (TSLA:NASDAQ), but what if you want to avoid some of the higher rated, higher risks stock and add US value to your portfolio?

HOW INVESTORS CAN TAP VALUE IN AMERICA

Most investors will not associate the US markets with value. The 12-month forward price to earnings multiple for the S&P 500, for example, currently stands at 20.3. Yes, it has been higher in the past – it was more than 23 a year ago – but this is hardly value territory.

Yet value investors have both ETF and actively managed options available to them, although you might have to do some digging to see if they are appropriate for you.

For example, the M&G North American Value Fund (B61S424) aims to deliver capital and income performance, net of 0.97% ongoing charges, which beat the total returns of the S&P 500 over any five-year period.

The strategy is to invest in ‘undervalued’ stocks, what the manager calls ‘cheap and out-of-favour companies’, whose share price does not accurately reflect the valuation of the business. Given that the S&P 500 is dominated by large cap technology and growth stocks, beating the S&P 500 sounds like a tall order for a traditional value portfolio.

Peeking inside the M&G fund’s top 10 holdings and investors might conclude that this is anything but a traditional value portfolio. Google and Facebook parents Alphabet (GOOG:NASDAQ) and Meta Platforms (META:NASDAQ) are its two largest holdings, worth a combined 8.2% of assets.

Having a pair of stocks trading on forward price to earnings (PE) multiples of 21.3 and 18.9 respectively (according to Stockopedia data) might surprise for a fund with the word ‘value’ in its name.

Readers must consider that it is the manager’s opinion that both stocks are undervalued despite elevated PEs. Other metrics may be relevant and it is their job to make calls on investors behalf.

It is also true that the top 10 holdings include the likes of Johnson & Johnson (JNJ:NYSE) – whose PE is below 15 – while banks and big oil are present, but so too is Oracle (ORCL:NYSE), on a PE of 20.5. The fund’s average PE is 13.9.

The portfolio top 10 of the MFS Meridian US Value Fund (B08N668) looks more suited to a traditional value ethos, featuring JPMorgan Chase (JPM:NYSE) (PE 9.7) as its largest holding. You can’t get much more value orientated than a big bank, while insurance – Aon (AON:NYSE), healthcare – Cigna (CI:NYSE) and Johnson & Johnson again, big oil – ConocoPhillips (COP:NYSE) and defence group Northrop Grumman (NOP:NYSE) are also in the top 10.

Yet MFS Meridian US Value Fund’s average PE is 16.2, according to Morningstar data. This illustrates that investors need to look under the bonnet of a fund before committing to make sure of what you are backing.

LOW-COST ETF VALUE OPTION

A cheaper value alterative to consider is the iShares Edge MSCI USA Value Factor ETF (IUVF). The iShares fund is designed to mirror the performance of the MSCI USA Enhanced Value index, which is composed of US large and mid-cap companies with favourable value characteristics, based on the price to book value, price to forward earnings, and enterprise value to cash flow from operations. The ETF has a 0.2% ongoing charge.

There are approximately 150 holdings in the index, which as of 22 August 2023, had an average price to forward earnings ratio of 10.9 and price to book ratio of 1.5, according to Morningstar.

From a sector perspective technology has the largest weighting at 29.5%, followed by healthcare (14.1%), financials (10.9%) and consumer discretionary (10.6%).

TUNING OUT OF TECH

What if you want exposure to the world’s largest economy but without highly valued tech companies? The Premier Miton US Opportunities (B8278F5) is one option. This fund aims to grow capital growth over the longer-term (at least five years) but largely eschewing the tech sphere. Less than 15% of assets are in the TMT (technology, media, telecommunications) space and many of the top 10 names would be unfamiliar to most readers (see table).

But despite this lack of tech, the strategy seems to have worked well, providing consistent above-benchmark returns over three, five and 10-year periods.

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