Four Myths On US Stock Market Investing (and How To Overcome Them)

22nd Sep '23 by Megan Boxall

22 comments 1617 reads

For many investors, the big markets across the pond can feel unfamiliar, unwelcome and a recipe for expensive mistakes.

But the opportunities in US stocks should not be forgone for the sake of a few pain points. This article aims to help you overcome the challenges that come with gaining access to the most exciting stock market in the world.

Pain point 1: Foreign exchange costs eat into my returns

There is no denying the presence of foreign exchange risk when you buy stocks in overseas markets whose shares are listed in a different currency to the ones you trade in. If, for example, the value of the USD decreases against the GBP, British investors’ return on their US holdings will be diminished (even if the company’s share price hasn’t fallen).

Not only that, but there are currency conversion costs to contend with. Most platforms and brokers charge you a percentage fee for buying and selling shares which are listed in an overseas currency and these can eat into your returns.

But is this enough to diminish the benefits of US investing? Not in my book.

For a start, currency movements don’t always act against the investor - a rise in the USD against the GBP will boost your investment, even if the share is underperforming. And if you are concerned about the fluctuation in foreign currencies, there are a number of hedging strategies that we will discuss below. When it comes to FX fees, don’t assume all platforms and brokers are out to rip you off. Today there are many which offer very competitive fees for foreign share dealing and FX conversion.

Solution: Hedge against FX movements

When a British investor buys a stock that is listed in USD they might consider that they are ‘long’ the USD - that is, they are assuming that the value of the USD will rise against the value of the sterling which they have converted from. To hedge against that movement, investors might consider buying a short USD ETF, whose return will act in the opposite way to the movement of the USD against the GBP. Any currency movement which impacts the returns on the stock will be outweighed by the return of the ETF.

Alternatively you can use a spread betting account to short the USD (or other USD denominated shares) to hedge against any currency movements. Spread betting allows you…

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Monty Carlo

22nd Sep '23

I have heard good things about Charles Schwab, although I don't believe they offer ISAs or SIPPs?

While the UK arm is FCA regulated, the catch is that you are outside the UK compensation framework - no FSCS coverage. Yes, the US has its equivalent, but you are in a different regulatory & legal environment.

I accept some folk will be fine with this.

Rusty2

IG group have no US dealing cost (if you do 3 trades, in any market, in the previous month). Share prices seem the same as HL's. IGG are good if you want to buy small amounts, as only forex fee, can't buy than about $100 though.

The spread on US shares is generally lower than the UK. Smaller companies below $1bn, tend to get very little analyst coverage.

I would not call some of the costs myths. HL I did find too expensive. IGG are ok until something goes wrong, then they are completely useless, as I found out.

No Schwab don't offer ISAs, otherwise I would be using them. Problem with ISAs is the money has to be converted into £s, so you will always have the forex fees. IBKR seem to be the best for ISAs but their platform is complex.

Just had a look - Schwab charge 1% for sub $100k FX conversion if you seed account with £ cash.

Steps down in tiers quite rapidly after that, to 0.2% for >$1m, which is quite reasonable.

So for smaller investors advantage relative to II is limted unless you trade alot, for larger investors it is worth investigating.

Yes but you can trade in US$s, so there is no need to convert each time, once you have your funds in $s. So it is one off fee. You may have funds in $s already, I have some US shares, not in an ISA, I could sell and transfer the US$s to Schwab. You can convert your £ into $s, elsewhere, it does not have to with Schwab.

II is £11.99 plus 1.25% per trade? That is worse than HL.

topvest

Thanks for this. Very useful - its the first time I had fully appreciated the fact that US and European shares deduct 15% withholding tax on dividends, even if held within investment trusts. This is quite a drag on income levels and underlines a major positive on holding UK shares!

No...

With II you can run multi-currency accounts and keep cash in foreign currencies for as long as you wish (and receive interest and dividends in foreign currency as well) and then use that foreign cash to buy overseas shares, so same as Schwab.

Just be aware the potential CGT implications of holding foreign cash in a nominee brokerage account (rather than a bank account) are quite horrendous if you wish to follow HMRC rules to the letter!

II monthy fee includes some free trades so depends on how often you trade really. If you are buy & hold there isn't much in it.

If I were to liquidate my entire US$ portfolio and convert to £ then Schwab is admittedly much cheaper, but not enough to make it worth adding yet another platform.

But dividends in the US tend to be lower or non existent, several of the larger stocks pay no dividends or low ones. They invest the money back into the business rather than giving it away. Probably why they grow more.

The US doesn't withold the 15% if you hold in a SIPP with a W-8BEN form in place, they do for an ISA.

So you hold your US divi-paying stocks in your SIPP, and the zero yielders in your ISA or trading account.

If you transfer your $s from II to Schwab, then you will have free trading?

I think that depends on the SIPP provider, HL do reclaim the 15% withholding tax but I read some others don't do that. Hence I have Somero Enterprises (LON:SOM) in my SIPP.

Do II reclaim this in a SIPP?

Probably.

However free trading is very low down on my list of priorities. Trading commissions are a small proportion of my costs relative to stamp duty, FX and dealing spreads.

Limiting the number of reporting formats that I have to process for tax reporting , reinvesting cash promptly and dealing with corporate actions are items much higher on my list.

Not to mention reducing the number of log-ons to manage SIPPs/ISAs/JISAs and then trading accounts in multiple currencies for the whole family.

Thats why I prefer everything in an ISA, then no worries about tax and tax form. But trading costs are a real issue for me, that is why I moved away from HL although IG don't cover some markets such as the French or Scandinavian or do funds.

Our SIPPs were built up on a different platform so can't confirm. I own too many awkward securities that won't transfer in-specie to stomach the transfer hassle.

Gregs

Interactive Investor’s FX conversion rates start at 1.50% (up to £25,000) but are then step reduced depending on the amount you exchange. For example, a lump sum above £600,000 is at a rate of 0.25%

abtan

23rd Sep '23

Hi topvest

"US and European shares deduct 15% withholding tax on dividends"

Countries in Europe each have their own dividend withholding tax.

I've been charged 30% from Swedish dividends, and bizarrely it's varied for German and Spanish dividends (between 26.38% and 26.50% for the former that I can see from my notes - I don't know why it changes and why such random amounts.)

Switzerland charge 35%, which led to me dropping my Ferrexpo (LON:FXPO) holding a while back. When I looked into reclaiming this it was a nightmare and I gave up.

HL don't disclose the foreign dividend tax - they just plop the final amount into your account.

Epitychia

25th Sep '23

Yes, the US has been the place to be over the last 10 years, hence the flurry of articles. Isn't that a reason to avoid the U.S. now on a contrarian basis.

Alphaflight

Megan, your information is misleading. Hargreaves Lansdown DO NOT charge a 0.45% custody fee for investment trusts, ETFs, gilts/bonds, US stocks, European stocks, or stocks in any other jurisdiction for that matter. They only apply a custodian fee for their funds:

Source

Megan Boxall

26th Sep '23

Hi, this table is a comparison of the fees for ISA accounts. Hargreaves Lansdown do charge a 0.45% ongoing custody fee for holding shares in an ISA.

But Megan, it is capped at £45 per year, so any shares over £10,000 the fee will not apply. Most people will have over £10k, in their ISAs. Your example is based on £50k.

Four myths on US stock market investing (and how to overcome them)

Pain point 1: Foreign exchange costs eat into my returns

Solution: Hedge against FX movements

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Megan Boxall

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