Searching the best ways to invest in America while avoiding huge platform fees.
Everybody's been getting very excited about investing in the US lately. Why? Because its stock market fell around -1% last year. That isn't great, but it was enough to thrash almost every other market in the world.
Investors have been predicting this 'outperformance' will continue in 2012. I'm always nervous when analysts agree, because there is danger in numbers, just as there was a year ago, when everybody was predicting another great year for the BRICs.
That didn't stop me from joining in the fun, arguing that the US could surprise us again in 2012.
The comeback kids
But figures published last week seem to back their case. In January, the US economy grew for the 32nd month, according to a survey by the Institute for Supply Management. There was also great news on jobs, with non-farm payrolls rising by a market-boosting 243,000 jobs, easily beating the consensus expectation of 150,000.
The good jobs news continued this week. On Tuesday, the number of available jobs hit a three-year high of 3.4 million in December, according to The Labor Department.
The US is working.
My quest
The death of the American empire looks like it may have been exaggerated. As I wrote in 2009, America ain't dead yet, and it is slowly returning to health. So I've decided to tip a bit of money America's way. Rather than chasing individual stocks, I want a US fund that I can buy, hold and ignore for the next 20 years.
I don't want an actively managed unit trust because, over 20 years, those charges really stack up. Another drawback is that the fund manager could always move on and be replaced by a duffer.
Plus the US is the most heavily researched market in the world. That makes it very hard for active managers to outperform. Most of them end up trailing trackers.
So I'm looking for a low-cost tracker, exchange traded fund (ETF) or, possibly, an investment trust. I'm hoping you may be able to help.
Ugly is as ugly does
There is one obstacle, and it's a big one. I am investing £1,500 of spare funds held in an ISA managed by Hargreaves Lansdown (HL), which recently introduced an ugly £2 monthly platform fee on low-cost trackers. It claims it was losing money on trackers because the charges didn't cover its admin costs, but it has made life tricky for me
It scuppered my first choice, HSBC American Index, which tracks the S&P 500. It has a total expense ratio (TER) of just 0.25%, almost as low as the much-vaunted Vanguard range of trackers, which charge 0.2%.
But on my £1,500, that £2 monthly fee works out as an annual fee of 1.6%. So I'm actually paying 1.85%. That's scandalous for a tracker, even Virgin doesn't charge that much.
So I switched my attention to L&G US Index, which tracks the FTSE World USA Index and has an annual management charge of 0.65%. Hargreaves Lansdown charges a lower fee of £1 a month for this fund.
This still works out at 1.45% of my £1,500, which is codswallop for a tracker.
In income we trust
I was tempted by investment trust JP Morgan US Equity Income, which targets undervalued, established companies with conservative balance sheets and consistent dividends.
It aims to offer a higher yield than the S&P 500, and currently yields around 2.3%, against around 1.3% on the index. It has an annual management fee of 1.5%, with no HL platform fee.
That's still too high for me, wiping out the benefit of that extra yield. If I wanted to pay 1.5% a year, I'd be looking at unit trusts as well.
Between BlackRock and a hard place
So what about Vanguard US Equity Index? It would be my first choice, if it wasn't for that pesky £2 monthly platform fee. That pushes up my effective TER from a foxy 0.2% to a foul 1.8%
Then I noticed that HL offers BlackRock North American Equity Tracker without any platform fee. It may have a TER of 0.57%, but that will cost me just £8.55 a year. Hargreaves also waives the 5% initial charge on this fund.
So that becomes my first choice, by default.
Aristos R US
I do have another idea up my sleeve, an ETF called the S&P 500 Dividend Aristocrats. This tracks the S&P High Yield Dividend Aristocrats Index, which covers the 60 highest-yielding large-cap US companies that have followed a policy of increasing dividends every year for at least 25 consecutive years.
It was only launched in October, but the index was launched in 1999 and has subsequently slaughtered the S&P 500 Index, generating a total return of 146% compared to a drop of -2%.
That looks very tempting. But again, there's that £2 platform fee.
Hargreaves will keep my current ISA funds, because I don't want to pay its exit penalties. But any future money will go elsewhere. So maybe the BlackRock tracker this year, and S&P 500 Dividend Aristocrats with next year's allowance?
Any thoughts?
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