How to Safely Invest in the UK Economy

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The United Kingdom (UK) may be the fifth-largest national economy in the world, but it houses the world's second largest financial center after New York City. In fact, London is one of the largest cities in the world and has the highest city gross domestic product (GDP) in Europe. That makes the UK a very important financial hub for international investors.

The London Stock Exchange has a market capitalization of over $3 trillion, making it the fifth-largest stock exchange in the world. There are around 2,000 companies from over 100 countries listed on the exchange, including those from Africa, China, Latin America, Europe, and Asia.

Key Takeaways

  • The United Kingdom is an important world financial center, and the London Stock Exchange (LSE) is the fifth-largest stock exchange in the world.
  • Benefits of investing in the UK include its status as a financial hub and its many blue-chip companies.
  • Risks include its service economy, which could lead to fluctuating consumer credit and commodity prices, as well as political instability.
  • Investors can invest in the UK by using a variety of different methods, from easy-to-use ETFs and ADRs, to direct investment in the LSE.

Benefits and Risks Investing in the UK

Investing in the UK may be safer than many emerging and frontier markets, but there are still many risks that investors should take into account. Some benefits of investing in the UK include:

  • Financial Hub: London has one of the most advanced financial markets in the world next to New York, which makes the securities market a very stable and liquid one for investors who are looking for exposure outside of the United States.
  • Blue Chip Stocks: The UK is home to many of the largest blue chip companies in the world, ranging from Rio Tinto to BP to GlaxoSmithKline, which makes investing in the region less risky than other financial markets around the world.

Some risks to investing in the UK include:

  • Service Economy: The UK's economy is made up of over 70% services, which is common among developed countries. While that can mean more stability, changes in consumer credit and commodity prices can quickly cause problems.
  • Political Risks: Britain has left the European Union. Scotland has made similar threats to leave the United Kingdom. These kinds of threats could lead to economic volatility.

Invest in the UK with ETFs and ADRs

One easy way to invest in the UK is through exchange-traded funds (ETFs), which provide investors with diversified exposure in a single security that can be traded just like stocks. The most popular ETF in the market is the MSCI United Kingdom Index Fund (EWU), but there are several other funds that also have exposure to the region.

Here are some other popular ETFs to invest in the UK:

  • BLDRS Europe 100 ADR Index Fund (ADRU)
  • SPDR DJ STOXX 50 ETF (FEU)
  • STOXX European Select Dividend Index Fund (FDD)
  • BLDRS Developed Markets 100 ADR Index (ADRD)

But those who are looking for a more targeted approach can also purchase American depository receipts (ADRs), which are U.S.-listed securities that mimic the movement of a single foreign stock. These securities can give investors a way to invest in only certain companies or industries rather than a whole basket that spans many sectors, but note that ADRs may be less liquid and carry higher transaction costs than their domestic counterparts. Here are some popular ADRs to invest in the UK:

  • Barclays plc (BCS)
  • BP plc (BP)
  • GlaxoSmithKline plc (GSK)
  • Rio Tinto plc (RIO)
  • BHP Billiton plc (BBL)

How to Directly Invest in the UK

Investors who are looking to take a more direct approach can also purchase stocks on the London Stock Exchange (LSE). While some U.S. brokerage accounts offer international trading capabilities, some investors may have to open foreign brokerage accounts. And all investors should carefully consider the tax implications of investing in the UK directly.

U.S. brokerages offer access to the London Stock Exchange, including companies like eTrade Financial Corporation and Interactive Brokers. Alternatively, popular UK stock brokerages include companies like Banco Santander's Abbey Sharedealing and Barclays Stockbrokers.

Article Sources

  1. U.S. International Trade Administration. “United Kingdom -Country Commercial Guide, Market Overview.” Accessed January 26, 2022.

  2. The World Bank. "Market Capitalization of Listed Domestic Companies (Current US$) - United Kingdom." Accessed January 26, 2022.

  3. Statista. “Number of Companies Trading Monthly on The London Stock Exchange (LSE) from January 2015 to November 2021.” Accessed January 26, 2022.

  4. U.K. Parliament House of Commons Library. “Service Industries: Key Economic Indicators.” Accessed January 26, 2022.