How to Safely Invest in the UK Economy

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

The London Stock Exchange has a market capitalization of over $6 trillion, making it the third largest stock exchange in the world. There are around 3,000 companies from over 60 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 third-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 using a variety of different methods, from easy-to-use ETFs and ADRs, to direct investment in the LSE.

Benefits & 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 looking for exposure outside of the United States.
  • Blue Chip Stocks: The UK houses 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 this can mean more stability, changes in consumer credit and commodity prices can quickly cause problems.
  • Political Risks: Britain threatened to leave the European Union in 2016, which introduced a high level of political risk to its economy. Scotland has made similar threats to leave the United Kingdom. These kinds of threats could lead to economic volatility.

Invest in the UK with ETF & 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 a stock. 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 popular ETFs to invest in the UK:

  • MSCI United Kingdom Index Fund (EWU)
  • BLDRS Europe 100 ADR Index Fund (ADRU)
  • STOXX European Select Dividend Index Fund (FDD)
  • BLDRS Developed Markets 100 ADR Index (ADRD)

But those 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 that of 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 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 offering 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. But before investors, investors should be aware of any tax or legal implications.