Has it paid off to invest differently in the US?

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With plenty of worries about the concentration of the US market, has it paid off to invest there in a less conventional manner? The team looks at different ways to invest in the US, and how they have fared.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome back to On The Money, the weekly show that covers investments and pension topics in a practical manner. 

This week’s topic is the US and whether rethinking exposure to that market has paid off.

It’s a market dominated by a small number of companies, the so-called Magnificent Seven, which collectively accounts for around a third of the S&P 500 index.

That concentration risk has seen some investors try to tap the world’s biggest market in a different way.

Joining me back on the show is Dave, who has crunched some numbers looking at how different types of strategies have worked in recent times.

Dave, welcome back. Could you firstly give us a quick overview of what you looked into?

Dave Baxter, senior fund content specialist at interactive investor: Yeah. So, as you said, there are question marks over the conventional way of accessing the US, and you could also say that of accessing global markets because they can be very US-heavy.

So, we’ve looked at five different ways that you can approach the US/the global markets, and we have crunched really quite a lot of data looking at how those approaches have fared versus the S&P, versus the MSCI World Index, and so on.

It’s just a snapshot. We’ve looked over one, three and five years to mid-October, roughly the time of recording. We’re basically going to talk through those approaches and how the different strategies have fared.

We’re going to try and avoid getting too bogged down in numbers just for the sake of digestibility, but we are going to put a lot of tables up for people watching the video, so they can digest those numbers themselves.

Kyle Caldwell: The first strategy you looked at is the equal-weighted approach. So, funds that follow this approach hold companies in equal proportion. So, if it’s an equal-weighted index fund or exchange-traded fund (ETF) following the FTSE 100, that would theoretically own 1% of each company. For the S&P 500, each company would be worth 0.2%.

Could you talk through both the benefits and the potential flaws of this strategy?

Dave Baxter: So, the benefits. As you’ve mentioned, the so-called Mag 7 shares make up an enormous chunk of the S&P nowadays. So, you are taking a lot of risk on how things pan out for a handful of companies.

By taking the equal-weight approach, you are still getting exposure to the biggest market, the biggest economy in the world and so on, but you are erasing that single-stock risk.

The main disadvantage is that you are missing out on the gains from those individual stocks, and the reason they are so big in those markets is because they have outperformed the competition for such a long time.

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Kyle Caldwell: So, with the much more common market capitalization approach, that lets your winners keep on winning. And with an equal weighted, they trim back every winner, typically on a quarterly basis.

Now, for me, these days, there’s an ETF for everything. You can gain exposure to various themes, sectors, stock markets. And I do think sometimes, not every index needs to be turned into an index fund or an ETF. 

My understanding is that, back in the day, a traditional index fund or ETF would compare its performance against an equal-weight index. And then we’ve had some products come to market that adopt the equal-weight approach. 

For me, there’s various academic studies that show that, over the long term, it’s a very small number of stocks that drive the performance of a particular market. So, given that’s the case, I would like to see my winners continue to win rather than be cut back. But that’s just my opinion.

I can see merits in the approach, particularly at times like this. It is a way of reducing concentration risk, but I think if you’re investing for the long term, 10 years-plus, I just think that the more traditional approach, I’d be more in favour of that potentially winning out.

Dave Baxter: You can also argue that these classic market-cap trackers are kind of momentum funds. They are backing the winners. So, as you say, if you just use it for the long term, then it’s just going to change composition over that period to account for who is winning then. But you will always kind of be backing the current winners.

Kyle Caldwell: Yeah. Because with an equal-weighted ETF, you’re betting against profitability and size.

Dave Baxter: Mhmm.

Kyle Caldwell: So, you need to consider that. Also, given that they rebalance on a quarterly basis, you’re not getting pure equal-weight exposure the whole time. It makes sense that they rebalance quarterly because they want to keep trading costs down as much as possible. They can’t do it probably more frequently than that because if they do, then the trading costs will go up.

Dave Baxter: Yeah. I guess to play devil’s advocate slightly, one idea is that the equal-weight fund will hold up better if those big stocks do sell off, so you’ll dodge a bullet to an extent. 

We did see that in 2022, so growth stocks sold off a lot. I think the S&P lost something like 9% in sterling terms, so pretty painful. If you took the equal-weight version of that same index, that still made a loss, but it was only a 1% loss.

So, if you had another larger version of this big sell-off for those leading big companies, then perhaps the equal-weight approach would help you out.

Kyle Caldwell: Yeah. For me, it’s more of a tactical decision to have an equal-weighted approach. I do think over the long term, the likelihood is that the more traditional market-cap weighted approach would tend to outperform if we’re in an environment where, over that period, markets mainly rise.

Dave Baxter: And there is also one idea of holding those two funds alongside each other, so maybe someone could use them to kind of moderate their exposure too.

Kyle Caldwell: For those who are interested in an equal-weighted approach, we do have a couple of the funds on the interactive investor platform.

There’s the Invesco S&P 500 Equal Weight ETF Acc GBP (LSE:SPEX), Xtrackers S&P 500 EW ETF 1C GBP (LSE:XDWE), and the UBS S&P 500 Equal Weight SF ETF USD acc GBP (LSE:S5EQ).

The next approach you looked at, Dave, was global funds that simply exclude the US. There’s not too many of these products, and some of them have come to market in the past couple of years in order to try and address the concentration risk concerns that some investors do indeed have.

Could you talk through how the funds have performed so far?

Dave Baxter: Yeah. I wanted first - maybe this is slightly kind of cherry-picking for the ex-USA funds - to look at 2025, because that was a year when you had trade war talk from the US president, you saw the US dollar plunge, and at least on a relative basis versus other major equity regions, the S&P struggled, although really it still did well.

What was interesting was the MSCI World ex-USA index that these funds track made something like 23% in sterling terms in 2025, whereas the MSCI World, which includes the US, made 13%. So, the ex-USA approach really paid off.

However, things have reverted a bit since then, and now if you look over, say, 12 months to the point we’re talking, then the two are roughly on the same level of performance and the conventional MSCI World is ahead over three and five years. So, again, it might be the case that the conventional approach still pays off in the longer term.

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Kyle Caldwell: When you look under the bonnet of funds that adopt this approach, one thing to bear in mind is that they tend to have just over 20% of their assets in Japan, and they also give greater European exposure.

On the one hand, you might think it gives you greater exposure to these areas, and you might not actually have to have a dedicated active fund or index funds that invest in those markets. That could be the way to gain greater diversification by having exposure to both Japan and Europe. 

But the other side of the argument is that I think it’s a very brave and bold decision to completely bet against the US. It’s home to arguably the world’s most entrepreneurial and innovative companies.

And it’s a great way to tap into technology trends, particularly AI. So, do you really want to be so bold to go completely against the US?

Dave Baxter: For the last decade or so, we’ve both monitored fund managers, and it’s interesting because you always get this conversation about the US looking expensive, overextended, maybe due a crash, and so on. But it’s just such a massive career risk for them to ever ignore the US, and such great returns have come from that region.

Kyle Caldwell: Having said that, two options we have at interactive investor, if you want to strip out the US completely, is Amundi MSCI World Ex USA ETF Acc GBP (LSE:WEXU), and the Xtrackers MSCI World ex USA 1C GBP (LSE:XMWX).

The next way to reduce concentration risk with the US market is to focus on dividend-focused strategies. This helps investors look past the big growth stocks. And, in theory, if you’re investing in a fund that’s investing in dividend-paying companies, you’re gaining exposure to cheaper stocks, as there’s a tendency for dividend-paying stocks to fall under the value style of investing, whereas a traditional S&P 500 index fund is much more growth focused.

Kyle Caldwell: So, Dave, what was your analysis of these types of funds and what are your thoughts?

Dave Baxter: I looked at one very popular passive option, and I’ve also looked at a couple of active funds.

Of course, there are many active funds that haven’t managed to perform that well versus the conventional global or US exposure. 

But to start with the passive approach, a very popular ETF is - and this name is a bit of a mouthful, so excuse me – Vanguard FTSE AllWld HiDivYld ETF USDAcc GBP (LSE:VHYG), which as the name suggests, does look for those higher-yielding stocks.

And, yeah, its focus means that it looks past some of the dominant areas and growth markets. So, North America only accounts for something like 45% of the fund, while Europe’s on about a quarter of the portfolio, the so-called Pacific region makes up, from eyeballing the charts, about 15%, and then emerging markets make up 10% or more.

So, you’re getting different regions to the US, and I think that would explain why this fund and the index it tracks has done pretty well against global and US indices in recent times.

One other reason would be that it’s income focus also means that around a third of the portfolio is in financials, and of course in the last year or so we’ve seen banks in particular doing really well.

So, these are areas that have been quite out of favour, but with things rotating a bit with a bit less focus on the US, we’re finally seeing them come through. 

And then briefly just touching on the active side. As I mentioned, we’re just looking at a couple of the rare names that have done well, but one very popular fund that’s done well, and a lot of people are buying it on ii, is Artemis Global Income I Inc (B5N9956), which again has benefited from things like financials, emerging markets, and so on.

There’s also Murray International Ord (LSE:MYI), which has been known for a very long time for looking past the US, and has a good spread of exposures across Europe, Asia, and so on. 

With those two funds, it’s interesting that they can work quite well as a diversifier against conventional global and US markets. Murray International, in particular in years like 2022, when popular stocks fell out of bed, has done really well, but sometimes it’s really struggled when the S&P and so on have come roaring back to life.

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Kyle Caldwell: In general, global ex-income funds, do tend to be so-called underweight the US. I think one of the main reasons why that’s the case is because the dividend yields for US companies are typically pretty low. 

And you do see a global fund manager venture more to Europe or have some UK exposure. Although having said that, some global funds deliberately don’t have much in the UK as a sort of selling points. You know, ‘If you’ve already got UK exposure, come to us. We’ve not got much in the UK’. So, as ever, it’s important to look under the bonnet and understand the strategy.

Another appeal with dividend-focused investing is that if we get a downturn for stock markets, dividend-paying companies tend to hold up better than more growth-focused stocks.

Dave Baxter: Yeah. And it is just as I said as well, it’s just generally a kind of diversification, isn’t it. This isn’t always the case, but you’re often just getting a different kind of flavour of exposure to if you backed an S&P 500 tracker.

Kyle Caldwell: Now, Dave, we know the attractions of smaller companies over the long term. There’s been academic studies that have shown that over a 50-year period, smaller companies tend to produce outsized returns versus larger companies.

However, most investors haven’t got 50 years. So, what’s the outlook at the moment for smaller companies? I mean, it’s been a particularly tough couple of years as interest rates have risen, which has been a big headwind for that part of the market.

Dave Baxter: Yeah. I think globally, and also in regions like the UK, you have seen a bit of life in small caps in the last year or so, and you have seen them [making] more of an effort to narrow the gap against those bigger companies.

But more generally in recent years, small caps have just been out of favour, they’ve lagged. Maybe that’s to do with the dominance of, say, globally the Mag 7 and so on.

In the UK, maybe it’s because you’ve had certain sectors more associated with the FTSE 100 coming back to life. So, yeah, it has been quite a trying time for the smaller company investor, although the contrarian in me, and, again, the diversifier within me, says that might be part of the appeal. It’s still something that isn’t captured by conventional trackers, and maybe over time it will pay off, but it [does require] patience.

Kyle Caldwell: Investors can gain exposure to US smaller companies through index funds and ETFs, although I should point out that for a US smaller company, they’re not actually that small. Their market caps tend to be over $1 billion.It’s not like the UK, where smaller companies [have a] market cap of £300 million and below, for example. 

It is considered to be an area where active fund management can really add value because there’s fewer people researching that part of the market. Is that the route you would advocate going down?

Dave Baxter: I think it is an interesting avenue, and I do...yeah. The rationale does seem appealing. I think if you look at some of the active funds out there, they have had some relatively largely underwhelming returns in recent years. But nevertheless, I do see the appeal of going more for stock picking, that kind of thing.

But again, it’s an area where you need to be very patient and you need to look very closely at the funds because they’re very different in where they focus, in their style.

You get some that are more tech-focused like Herald Ord (LSE:HRI), you get some quality focus names like Smithson Equity Fund S GBP Acc (BLBNK48), which is now an open-ended fund. And there’s just so much difference between the options that you can use.

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Kyle Caldwell: And if you’re seeking out global smaller company exposure through an actively managed fund, there’s not actually that many options. There’s The Global Smaller Companies Trust Ord (LSE:GSCT) investment trust, which is one of the dividend heroes. It pays a dividend, although the yield is very low. 

There’s also the abrdn Global Smaller Companies I Acc (B777SP3) fund, and there’s what was the Smithson Global Small Companies Strategy, which is now an open-ended fund.

But there really isn’t a huge amount of options, which interests me really. Maybe it’s because it’s a big universe, and it’s quite hard to narrow down the investment process to focus on a particular area.

Dave Baxter: I think an interesting trend you sometimes see in the fund space as well, is if an area has been struggling, then more funds that are focused there close, and there’s less demand for them. Then by the time you get to a point where you realize you do want that in your portfolio, there aren’t many options available. Then maybe if we see demand increase again, we’ll get more options coming into the space.

I did want to mention one name that cropped up, and that is Artemis. I think this year or last year they converted their small-cap fund to the SmartGARP strategy that’s been doing well. So, it’d be interesting to see whether that will pay off in the global small-cap universe.

Kyle Caldwell: Let’s conclude by looking at which actively managed funds have fared well both in the US and globally. 

Both markets have been very difficult for active fund managers on a five, 10-year basis to beat, given how concentrated both those stock markets have been, but you’ve picked out a number of funds that have fared very well.

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Dave Baxter: Yeah. I found a number of funds that have done well versus the S&P, which has performed better than the MSCI World over one, three and five years. So, they’ve beaten the S&P over each of those periods at the time of recording. 

Maybe you won’t go into all of them, but we can show a table, and there are some interesting, very different approaches on offer.

I mentioned that Artemis’ SmartGARP strategy has been doing very well across different regions, and their global equity funds have performed really well. That, as you’ll see with quite a few of these funds, is light-ish on the US. It has about 44% in the US, and it has nearly 30% of assets in emerging markets, which I imagine has been one of the things to help drive those superior returns, at least recently.

Let’s take a very different example. You’ve got WS Blue Whale Growth R Sterling Acc (BD6PG78), a very popular fund. That is very US heavy, something like 80% in the US, and it trades a lot, and changes positions a lot and has been really doubling down on AI in recent times.

Then, a dedicated US fund. There weren’t many that cross the thresholds that we wanted them to, but there’s one called BlackRock US Dynamic D Acc (B87XJQ6). What’s interesting here is that it does seem to back those tech majors very heavily, so has a lot of exposure to your NVIDIA Corp (NASDAQ:NVDA)s, your Microsoft Corp (NASDAQ:MSFT)s, your Amazon.com Inc (NASDAQ:AMZN)s, and so on.

Maybe that would struggle if the main market did. And then you have some slightly different names like Orbis OEIC Global Equity Standard (BJ02KW0), which has a real mix of assets, and then some dedicated value funds. A lesser-known one, perhaps, is M&G Global Strategic Value GBP I Acc (B6173L3).

So, you have an interesting, quite disparate group that have managed to perform this quite difficult task.

Kyle Caldwell: As you’ve just demonstrated, Dave, there are many different ways to beat both the US and the global stock market, but it is far from easy.

So, that concludes Dave’s research, which hopefully provides plenty of food for thought. Dave, thanks for coming on.

Dave Baxter: Thanks for having me on.

Kyle Caldwell: And thank you for listening to this episode of On The Money. As ever, we love to hear from listeners, and the way to get in touch is by emailing us at: otm@ii.co.uk. In the meantime, you can find plenty of investment inspiration on the interactive investor website, which is ii.co.uk. We’ll be back next Thursday. See you then.