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How can you invest in US markets?

What do Tesla, Apple, Amazon, Microsoft and Netflix have in common? It's not just the steep breakout in share prices that connects them, but also their origins. They are all US companies.

Whether it's stocks or ETFs, there's no getting around U.S. stocks on the stock market these days. So the question quickly arises, how do I invest in US stocks, what indices are there and is it true that US companies are overvalued? In this article, I will take a closer look at these questions.

The most important US stock markets

Speaking of the US stock markets, each of you will have heard the term "Wall Street". Even if you have nothing to do with stocks and ETFs, you will know the term from quite a few movies. Wallstreet is in itself just a street in Manhattan, New York. But at street number 11 you will find the most important stock exchange in the world: the New York Stock Exchange. It was founded in 1792 with only five securities.

But Wall Street is not alone in New York, there is another giant stock exchange directly at Times Square, namely the no less famous Nasdaq. Founded in 1971, this "computer exchange" offers, unlike Wall Street, no floor trading but purely computer-based trading. Nasdaq mainly contains companies that have something to do with technology in the broadest sense. It is also completely independent of its counterpart on Wall Street.

The most important indices

As an ETF investor, you are probably interested in which US indices are the most important. You should definitely know the following three indices:

Dow Jones Industrial Average

The oldest index: The Dow Jones Industrial Average is the oldest still existing stock index in the world. It was founded by Charles Dow and Edward Jones in 1884 and has existed in its current form with 30 stocks since 1928. The index composition does not follow any fixed rules, but is subject to the discretion of an independent committee of the Wall Street Journal. The weighting within the index is determined on the basis of the price of the respective shares. Over the past 5 years, the Dow Jones has risen by a total of 73.5% and by 12,482% since its inception in its current form in 1928.

Nasdaq-100

The technology index: the Nasdaq-100 index includes the 100 largest companies listed on Nasdaq. To create a shortlist, the companies in the investment universe are ranked in descending order of market capitalization. Over the past 5 years, the Nasdaq-100 has risen a whopping 178% and 5,567% since inception in 1985.

S&P 500

The most representative of the three: The Standard & Poor's 500 is a stock index that includes the shares of 500 of the largest publicly traded U.S. companies. The S&P 500 is weighted by market capitalization and is one of the most widely followed stock indices in the world. It is important to know here that it includes both Nasdaq and Wall Street stocks. It reflects the overall American economy. In the last 5 years, the S&P 500 has increased by a total of 81.8% and by 20,868% since 1928.

Stock culture in the USA

If you compare the investment behavior of investors from Germany and the USA, you quickly realize that many more people in the USA own shares. Whereas in Germany, shareholders are quickly labeled as "speculators," in the U.S. it is more the norm to secure one's retirement provision through shares.

Whereas in Germany people are exploring ways of taxing shareholders more heavily, in the USA there is the 401(K) plan.

Named after a tax paragraph, the 401(K) plan contains a model of private retirement provision co-financed by the employer. Employees can voluntarily contribute a portion of their monthly income (as of 2020, up to $19,500) to a separate 401(K) account. The money is deducted directly by the employer. The employee can choose different investment strategies, such as stock, balanced or bond funds. During the savings period, neither the money withdrawn nor any earnings (interest, dividends) have to be taxed as income.

According to a survey by the Gallup Organization, 55% of all US Americans held shares in 2018, whereas only around 16% of Germans aged 14 and over held shares directly or indirectly via funds.

USA & ETFs

It is therefore not surprising that the first ETF was launched in the USA in 1970. In general, ETFs are very popular in the USA. The largest ETF is then also an ETF based on an American index. The iShares Core S&P 500 UCITS ETF (Acc) (WKN: A0YEDG) ranks first among the world's largest ETFs with a fund size of 34 billion euros. In second place is the distributing Vanguard S&P 500 UCITS ETF with a fund size of 20 billion (WKN A1JX53).

But you don't have to immediately add an ETF on an American index to your portfolio to be heavily involved in the American economy. After all, the ever-popular MSCI World contains almost 66% American stocks. And the MSCI All Country World (ACWI) ETF, which adds emerging markets, is also 57% American. But the U.S. is not only strongly represented in the broad world indices. Even in technology or other sector ETFs, the proportion of American companies is usually over 60%.

You quickly realize that probably almost every investor holds American stocks in their portfolio in some way.

US-American stocks

How many US companies do you think are represented among the 10 largest public companies in the world? There are 7. And of the 100 largest, there are still 67 US companies. Just to make you aware of the magnitude. Apple has a higher market capitalization than the entire German benchmark index (DAX), which includes the 30 largest German companies, combined!

You may have also heard of FAANG stocks. Even if you can't imagine anything about FAANG, you know the companies because you probably use them every single day. Behind FAANG are the biggest and most important tech stocks in the world: Facebook, Apple, Amazon, Netflix, and Google. These five companies have fundamentally changed the everyday life of the Western world. Maybe you should take a look at these stocks, because if you had bought shares of these 5 companies in 2010, you would have earned an average return of 34.25% per year. You'd be hard pressed to find such steady performance outside of the US.

You see, it's the U.S. technology stocks that have run strong in recent years.

But also friends of the dividend strategy will have a real pleasure with US stocks. In the U.S., companies usually pay dividends on a quarterly basis, and some companies do so on a monthly basis. In addition, many of the companies attach great importance to steadily increasing dividends. Many dividend aristocrats (companies that have paid a dividend for over 25 years and also increase it annually) are U.S. companies.

A look into the future

Predicting which countries will become the biggest economic powers in the future is always difficult, of course, so I'll take the easy way out and refer to the auditors at PriceWaterHouseCooper (PWC). Under the title "The Long View - How will the global economic order change by 2050", PWC published a study in February 2017. According to the study, the future will be Asian. China and India are expected to rank first and second in 2050. However, the USA is already in third place, followed by Indonesia.

Despite outliers like Trump and a questionable healthcare and social system, the U.S. will continue to play at the big table. It certainly remains to be seen how relations between China and the USA will develop, but at present hardly anyone can imagine that the USA will lose much of its importance.

In stock market terms, it means that American companies will continue to grow for the time being. Especially in view of the difficulties in trading Asian stocks directly, it seems to me that there will be no getting around the USA in the next few years.

Conclusion

One often hears lately that US companies are highly overvalued. Looking at Tesla's 600% rally in 2020, one may certainly agree with these people. Yes, many companies are highly valued and yes, there has been a rally since 2010 that couldn't even be stopped in a big way by the Corona pandemic. But a look at the trend in the total amount of all net profits for companies in the S&P 500 can provide some reassurance.

From 2005 through the end of 2018, the total amount of all corporate net profits, earnings per share, and the index itself pretty much doubled. This shows that the overall market is performing fairly homogeneously. Which, of course, does not mean that individual companies are not massively overvalued. Especially in view of the Corona pandemic and its effects, one should take a close look at individual companies to see whether the price of the individual shares is justified, but this applies worldwide.

I like to invest in U.S. equities because U.S. citizens are encouraged to buy stocks through tax breaks, which means that the liquidity of the individual stocks is higher.

If you are not comfortable with the valuation of the U.S., you can hedge your bets with targeted purchases of regional ETFs, such as an Asia ETF. In the long term, however, there is no way around the USA.

I hope you enjoyed the article.

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