What sits inside a US equity fund?

US equity funds hold shares of companies that are listed in the United States. These businesses are either based there or carry out significant work in the country. More than 4,000 companies in a variety of sectors and industries are listed on prominent US stock exchanges. These include those with relatively modest market capitalisations of just a few million dollars to multinational giants worth more than $4 trillion.

Why investors use US equity exposure

The US is home to many of the world’s largest businesses. These include NVIDIA, Apple, Alphabet (Google), Microsoft and Amazon. It also accounts for more than half of the world’s equity market, with global leaders across sectors from technology to healthcare. As investors want exposure to world-leading corporations and a thriving stock market, they are understandably drawn to US equity funds.

Key risks to understand before you choose

There are no guarantees in investing. Just because the US market is big doesn’t mean that it’s immune to problems. Its stock market can still experience severe downturns. These slumps can obviously affect US equity investment funds. Other potential risks include macroeconomic factors, such as the impact of interest rates and currency fluctuations. Then there are sector-specific issues. For example, if you have a lot of exposure to an industry that runs into problems, valuations are likely to tumble.

Currency: unhedged vs hedged US equity funds

Investors in unhedged US equity funds will find that constant currency fluctuations will affect their returns. That’s why some people prefer to limit uncertainty through hedging. Hedging reduces the impact of sterling/dollar swings, so your returns reflect only the performance of US stocks and not foreign exchange movements. Some US equity funds offer currency-hedged share classes, but check the costs, as you may have to pay a premium. While hedged funds can reduce uncertainty caused by currency movements, they may sometimes underperform their unhedged counterparts.

The most common types of US equity funds

Let’s now explore the different types of US equity funds. Your first choice will be between index trackers and actively-managed funds. As the US market is closely followed, it’s very difficult for active managers to outperform. That’s why funds that passively track an index, such as the S&P 500, are popular. They’re also a lot cheaper.

Then there’s the growth v income question. Do you want to invest in businesses that are laser-focused on expansion or those that pay regular dividends to their investors?

US equity investment funds come in all shapes and sizes. For example, many favour the large-cap focus of the S&P 500 index. These are the giant US companies, such as Apple. Others prefer portfolios that blend large-cap stocks with medium- and small-cap stocks. This gives them broader exposure to the US market as a whole.

You can also opt for a thematic approach. For example, many technology funds are full of US companies because so many are based there.

How to choose a US equity fund

• Step 1: Define your goal. Do you want a growth-oriented portfolio or do you need a regular income?
• Step 2: What role will it play? Will it be a core holding or a satellite position to add some extra spice?
• Step 3: Pick active vs passive? Would you prefer your fund to track an index or try to outperform?
• Step 4: Definition of success. What benchmark will performance be compared against?
• Step 5: Costs that matter. How much will the investment cost? Check the ongoing costs figure, platform costs, and whether there are any performance fees.
• Step 6: Portfolio construction. Where has the fund put its assets? How much is in different sectors? What size businesses does it own?
• Step 7: Risk profile. Does the fund’s volatility and investment time horizon align with your objectives?
• Step 8: Operational basics. Check you know the fund’s dealing frequency, minimum investment levels and different share classes.

Costs explained: what investors actually pay

Costs can vary enormously between funds, and even seemingly low percentage differences can have a detrimental effect on returns. Pay particular attention to the Ongoing Charge Figure (OCF). This is a percentage representing a fund’s annual operating costs. Unfortunately, this doesn’t include everything. Entry and exit charges, transaction costs and any performance fees may still be payable.

How to invest in the US

It’s easy to invest in US equity investment funds, and you can protect yourself from tax liabilities by holding them in an Individual Savings Account or a Self-Invested Personal Pension. Once you’ve analysed the different types of US equity funds and decided on your favoured route, you can search for the portfolio that meets your needs. Then you’ll need to find a platform to give you access. There are plenty available, so make sure you’re comparing them on cost and service levels.

Our process & how we select funds

FundCalibre has analysed US equity funds for years. Analysts will subject portfolios to close scrutiny and only award the very best a prestigious Elite Rating. Their analysis starts with AlphaQuest, our proprietary quantitative screening tool. This estimates the likelihood that a fund manager will deliver superior returns. Those who pass this initial test will then be asked about important factors, such as their investment philosophy and approach to portfolio construction. The research gathered from these discussions and the previous analysis will then be subject to peer review within the team before a final buying decision is made.

Common mistakes when picking US equity funds

Here are the key potential mistakes

• Picking funds based on hype
• Focusing solely on past performance
• Ignoring currency risks
• Not paying attention to fund types
• Failing to research the manager
• Overlooking existing assets
• Not reviewing your portfolio regularly

FAQs about US equity funds