The United Kingdom has a long history of innovation and creativity. The television, programmable computer, telephone, Mini, and even Calculus are all British inventions. The British government was the first to create a revolutionary missile called the civil servant – it doesn’t work, and it’s nearly impossible to fire.😄 The U.K. also gave us David Beckham, Adele, The Beatles, Emily Blunt, and Christian Bale (heh). By the way, if you ignore the looks, wealth, charisma, and success, then there’s no real difference between me and Christian Bale. 😉
England is such a fascinating country and I’ve always wanted to invest there. But I’ve never found the right opportunity to do so, until now. 😉 With a cheapened currency and rising government bond yields, the U.K. is looking relatively attractive for foreign investors. So a few days ago I invested £11,000 in the U.K. stock market! I think the British would approve of my decision. 🙂
London, England is home to the world’s largest global financial center. Despite the rainy weather, its enduring popularity and rich history make London one of the most sought after cities to live in.
In today’s post we will explore why Great Britain may be a good place to invest in, how to do it, and what we can expect in the years to come. 🙂
Top 3 Reasons to Invest in the United Kingdom
Keep in mind these are my personal reasons and may not apply to everyone else’s situation.
- Geographical diversification. Back in 2014, the United States stock market represented 36% of the world’s total stock market cap. But according to the Wall Street Journal, it has recently climbed past 40% after Trump won the U.S. election.
But this trend cannot go on forever because the U.S. doesn’t have special privileges regarding innovation, profit growth, or stock market returns. Nearly all of my financial assets are in North America. Investing in the U.K. gives my portfolio some international exposure. - Cheap Pound Sterling. The British Pound (GBP) has recently become one of the most undervalued major currencies in the world. A couple of months ago the Pound fell to a 31 year low compared to the USD. So during my entire life so far, there has never been a better time to buy the Pound Sterling than this year. 🙂
- Decent historical returns. Here’s a look at how the FTSE performed over the last 25 years, compared to the Russell 3000 in the U.S. It’s nothing spectacular, but a 200% return in 2.5 decades isn’t bad. 🙂
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How to Invest in U.K. Stocks?
The simplest way to invest in Great Britain is to buy an index fund that tracks the broad U.K. stock market. Here are some to consider.
- iShares MSCI United Kingdom ETF (NYSE:EWU). Currency = $USD. Fees = 0.48%
- Vanguard FTSE Europe ETF (NYSE:VGK). Currency = $USD. Fees = 0.12% (Includes other European countries.)
- Vanguard FTSE 100 UCITS ETF (LON:VUKE). Currency = GBP. Fees = 0.09%
- iShares Core FTSE 100 UCITS ETF DIS (LON:ISF). Currency = GBP. Fees = 0.07%
- SPDR FTSE UK All Share UCITS ETF (LON:FTAL). Currency = GBP. Fees = 0.20%
Of course there are more funds in this category, but those are the ones I’ve found that have decent liquidity and low management fees. 🙂 The fund I chose to buy is the SPDR FTSE UK All Share (FTAL) on the LSE. It has an annualised tracking error of 0.14% which isn’t bad.
On Monday I converted some US and Canadian dollars into GBP, and purchased 250 units of FTAL at £43.99 each in my margin account with Interactive Brokers. The total cost came to £11,003.50.
Going directly to the source and buying U.K. equities on the London Stock Exchange gives me the potential to profit from both stock market appreciation, as well as currency gains if all goes well! 😀
Most brokerages in Canada don’t allow trading in GBP. But HSBC, Questrade, and IB offer access to international markets.
I decided to buy FTAL because I prefer to own all the stocks on the exchange rather than just the largest 100 names. AFAIK this ETF generates a 3.8% dividend yield that gets accumulated back into the fund instead of being paid out to investors.
£11,000 is equivalent to roughly $18,200 Canadian dollars. I know that’s quite a lot of money to spend on just one investment. I guess I really went to Pound town with this one. 😄 But since this ETF is made from over 400 individual stocks, it’s not as risky as it sounds. Here are the top holdings in the SPDR FTSE All Share index fund.
Economic and Market Outlook for Great Britain
We won’t know what will happen next year as the Brexit transition unfolds. But the London Stock Exchange has been around for over 300 years, and the Pound Sterling has been used for more than 800 years. The U.K. continues to remain resilient in the face of a global economic slowdown. Over the last 5 years Britain’s GDP grew 0.5% annually on average. Meanwhile the neighboring Eurozone, which is made up of 19 European countries, only grew 0.2%.
Europe is still mired in slow growth, high unemployment, and socialistic government policies. The Eurozone has an average unemployment rate of 9.8%, and a labor force participation rate of just 57%. Even large economies like France and Italy have double digit unemployment rates. 🙁
But Britain is different. Its unemployment rate is a manageable 4.8%, with a labor force participation rate of 78%. 🙂 Britain should continue to outgrow the rest of Europe for the next few years at least. This is why I decided to invest in just the U.K. for now, and not the entire European region.
The risks of investing in a foreign currency abroad is two fold. If U.K. stocks underperform Canadian or U.S. equities then I would lose out on the bigger gains I could have made back at home. The other issue is foreign exchange risk. Even though the British Pound is at multi-year lows against the $CAD, there’s no telling if it will continue to drop even lower. 🙁 But that’s a risk I’m willing to take because I believe the benefits of diversification is more important.
There will likely be some speed bumps in the near term, but I expect to make mid-single digit returns per year over the long run on my new investment from across the pond. 🙂
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Random Useless Fact:
So if I were to buy the exact same ETF you bought and hold it in my taxable account I wouldn’t pay any yearly taxes on dividends because the dividends are automatically reinvested? In other words, will I pay only capital appreciation tax when I sell the whole etf? Because if the answer is yes, that etf is an excellent choice for taxable accounts (my RRSP and TFSA are full with other stuff).
I assume that’s the case since this ETF claims to be accumulating rather than distributing. Also, when I look up this fund on Google Finance I do not see any dividend history on the chart. But I can’t confirm 100% until I’ve held this ETF for 3 months. If I don’t receive any dividends from it by Spring 2017 then it’s pretty safe to say it just rolls any dividends back into itself. Then all I do is pay capital gains tax once I sell it some day in the far future. Of course, keep in mind this fund has to purchased with British Pounds. I will update this article around April so if you come back later there will be more info here. Nice job maxing out your tax advantaged accounts.
[…] the other hand, when I decided to get into the United Kingdom stock market last year, I decided to buy a low-cost stock market ETF. I am only familiar with North American […]