How to Safely Invest in the UK Economy
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.
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. Scottland 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
The easiest 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)
- SPDR DJ STOXX 50 ETF (FEU)
- STOXX European Select Dividend Index Fund (FDD)
- BLDRS Developed Markets 100 ADR Index (ADRD)
But those looking for a more hands-on approach can also purchase American Depository Receipts (ADRs), which are U.S.-listed securities that mimic the movement of a 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. 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.
Key Points to Invest in the UK
- The UK is one of the world's oldest and largest financial centers with many large companies operating within its economy. These factors make it an attractive investment destination for international investors.
- Despite its size, the UK does face some key risks that merit careful consideration. For instance, its economy is highly dependent on consumers and therefore can be deeply affected by changes to consumer credit or commodity prices.
- Investors can invest in the UK using a variety of different methods, ranging from easy-to-use ETFs and ADRs to more complex direct investment in the London Stock Exchange.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.