Investment Insider: Look at the US to fill gaps in your portfolio

Sometimes there are just no British equivalents to some American companies

Whenever I am asked why anyone should buy American shares my stock response is always why not?

The reason for me is quite simply size. Calvin Coolidge, the 13th president of the United States, once said that: “The business of America is business.”

That is exemplified by the enormous size of some of America’s top corporations.

Take for example Coca-Cola and PepsiCo. They are both a couple of orders of magnitude bigger than our fizzy drinks makers Britvic and AG Barr. Elsewhere, ExxonMobil is around twice the size of our largest oil company, Royal Dutch Shell.

Additionally, while many of us might like to think that Tesco is the UK’s answer to Wal-Mart, it is some five times smaller than the American retail giant.

Another, and perhaps more important, reason for looking at US shares is that sometimes there are just no British equivalents to some American companies. Consider, for example, Apple, Walt Disney, General Electric, Intel and IBM. There are simply no comparable companies in the UK that could compete with these iconic American corporations.

Buying American shares for your portfolio couldn’t be easier these days. There was a time when UK investors could only get exposure to the US market through managed funds.

However, with the advent of online brokers, private investors can now buy American shares as easily as buying shares on the London Stock Exchange. That said, brokers will insist on the completion of a W-8BEN form, which exempts UK investors from paying tax on US dividends.

By and large, though, trading US shares is relatively straightforward. It may even be possible to buy shares in some US companies which have a listing on the London exchange, including Bank of America and General Electric.

If you are considering buying some US shares it might be a good idea to look for obvious gaps in your portfolio that could be filled by American companies.

For example, if there is a noticeable shortage of retail shares, then you may want to consider the likes of McDonalds, Wal-Mart or Home Depot. If it is technology that you are after, then Cisco Systems, Intel and IBM may fit the bill.

If you don’t have any specific shares in mind you could consider taking a more passive approach. This is where exchange traded funds (ETFs) might come in handy because they are effectively index trackers which trade like shares. Some of the most popular ETFs are those that track the Nasdaq, the S&P 500 and the Dow Jones Industrial Index. The Nasdaq 100 Trust or QUBEs, for example, tracks the Nasdaq 100 index; Diamonds Trust tracks the Dow Jones Industrial index and S&P Depositary Receipts hold all of the common shares in the S&P500.

It is also possible to buy London-listed ETFs that track the US stock market. For example, the iShares S&P 500 is designed to mimic the performance of the S&P 500.

From an economic perspective, there are signs that the US economy, after a protracted period of monetary easing, is growing again. Between April and June, US economic growth accelerated to 1.7 per cent compared to 1.1 per cent in the first three months of the year.

From an investor’s perspective, the boost in economic growth could bode well for not just the US but for US companies too.

David Kuo is director of fool.co.uk