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S&P 500 stocks offer UK investors a way to diversify their exposure away from the domestic stock market. Given the breadth of companies in the index, and the returns from the past few years, some might consider trying to build a portfolio solely around US stocks. In that case, here’s how I’d go about it.
Building the ISA
The first point I’d note is that the investor could do well to house the portfolio within an ISA. This means the investor can benefit from certain tax advantages, with most major brokers allowing UK investors to hold US stocks.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
There’s a £20k cap on the amount that can be invested in an ISA each year. I’m going to assume that someone has £5k in an ISA right now and can afford to add an additional £500 a month, aiming for it to reach £100k in value.
Next, we turn to portfolio allocation. The US is home to most of the major tech and artificial intelligence (AI) companies. Particularly when I look at AI, I think it’s a theme that will keep playing out for years to come.
As a result, I think a good portion of the ISA should be allocated to firms from this sector. For the remainder, I’d look to build a diversified portfolio with a focus on healthcare and consumer staples. These more mature areas of the market should help to reduce the risk associated with some high-growth tech stocks.
Reaching six figures
In terms of numbers, I think it’s fair to target a 10% annual return on the portfolio. Interestingly, over the past decade, the S&P 500’s risen by 366%. So I feel my future estimate’s conservative. Obviously, predicting years in advance isn’t an exact science at all!
Using this assumption, the portfolio could grow to £100k by the beginning of year 10. From that point onwards, the investor could decide not to add funds and just let the pot compound.
The risk is that during this period, we see a sustained stock market correction, which could throw the estimates off and delay reaching the goal.
US shares to analyse
In terms of specific stocks, tech companies like Alphabet and Meta could be considered. I feel they are large enough, with different fingers in various pies, to be able to pivot to whatever part of the AI ecosystem turns out to be the most profitable.
Aside from those stocks, another to consider is Johnson & Johnson (NYSE:JNJ). The share price is up 49% in the past year. At 2.32%, the dividend yield might not be super high, but it has been increased it for over 50 consecutive years.
Fundamentally, I think it’s a healthcare stock that’s well-positioned for the shift as the US population grows older. Further, it’s diversified, given it operates divisions including pharmaceuticals, medical devices, and even MedTech. This gives it a balanced mix of growth and defensive stability, which I think is valuable to have in the ISA alongside tech stocks.
In terms of risks, patent expiries on key products can be a headache. For example, Stelara, a previously high-revenue treatment, has seen sharp declines in sales as exclusivity deals roll off. Yet even with this concern, I still feel it’s a solid US stock worthy of further research.
