Should I add the VUSA ETF to my Stocks and Shares ISA?

Adding the VUSA ETF to my Stocks and Shares ISA would give it exposure to US stocks, in particular, big tech, which it lacks.

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My Stocks and Shares ISA is entirely invested in companies listed on the London Stock Exchange. Although they are from different industries and sectors, and some get their revenue globally, my ISA portfolio sufferers from home country bias. To remedy this I could invest in stocks listed on exchanges in other parts of the world. As a start, how about investing in companies from the world’s largest economy, the US?

There are problems when investing in US stocks inside an ISA, or any foreign stock. But thankfully there is a way for me to get around those problems and make this a simple endeavour.

The VUSA ETF

I can buy and sell Vanguard S&P 500 ETF (LSE: VUSA) inside my ISA just like any other UK-listed. It passively tracks the US S&P 500 index. What that means is that if I buy VUSA and the S&P 500 goes up, so will the value of my VUSA holdings. Likewise, if the S&P 500 goes down, my VUSA position will lose money.

Now, the VUSA stock price will not track the percentage gains or losses in the S&P 500 exactly. That’s because the managers of the VUSA ETF do extract an ongoing charge of 0.07% as a management fee which reduces returns, plus the tracking might not be perfect.

VUSA’s managers do have to construct a portfolio of the 504 US stocks in the S&P 500 in the correct proportions to track it. This is not straightforward, as the proportions change minute by minute. That’s why tracking might not be perfect, and also why they charge a management fee. And speaking of management fees, VUSA’s is reasonable: it’s not the highest of the available S&P 500 tracker options, nor is it the lowest. And it tracks the S&P 500 with a fairly low margin of error.

Tracking the S&P 500

So, why would tracking the S&P 500 help diversify my Stocks and Shares ISA? Well, as mentioned, it exposes me to stocks trading on another country’s exchanges, namely the US. I would get heightened exposure to the US economy, and shift away from the UK one.

As I have often lamented, the UK markets, and particularly the FTSE 100 index, is short on big tech names — in fact, tech in general. This industry has a 2.3% weighting by market value in the Footsie. The S&P 500, by contrast, is heavily weighted towards technology, at 26% in December 2022. The S&P 500 P/E ratio is around 20. The FTSE All-Share index has a P/E ratio of 12. So, tracking the US index would also increase my exposure to growth stocks.

Although tech stocks, and growth stocks in general, have had it hard of late, they previously have made remarkable gains. I would want exposure to them going forward.

Stocks and Shares ISA diversification

Although my Stocks and Shares ISA is composed entirely of UK-listed stocks, my SIPP portfolio is exposed to stocks from all over the world, and also other assets. I am happy with the diversification of my investment portfolio as a whole. However, if I only had my ISA, I would consider adding VUSA to diversify away from the UK, and get that exposure to US big tech growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James McCombie has positions in London Stock Exchange Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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