Investing in the US stock market: a beginner’s guide

The US is the world’s largest economy and home to the biggest and most liquid financial markets. The total market value of US equities dwarfs that of the rest of the world.

When measured using the MSCI All Country World index, the US accounts for 63.36% of the entire index. In contrast, UK stocks account for just 3.0%, making US stocks an area that no investor can afford to ignore.

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The main indices

The two most popular indices for US stocks are the Dow Jones Industrial Average and the S&P 500.

The Dow Jones is the world’s oldest index of stocks and dates to the late 19th century, when it was compiled by Charles Dow. Owing to its long history, the Dow Jones is often cited by non-financial news outlets as a general gauge of the US economy’s performance. However, the Dow Jones is composed of just 30 stocks and is “price weighted”, meaning that stocks with the highest share price receive the greatest weighting. Therefore, most investors view it as somewhat flawed and prefer the S&P 500.

As the name suggests, the S&P 500 is composed of 500 stocks. This means the index is a much more representative sample than the Dow. It is also market-capitalisation weighted, which is generally seen as a better way to construct an index, due to market capitalisation being a better gauge of the changing value of a listed company than price alone. As a result, most exchange-traded funds (ETFs) will use the S&P 500, while active fund performance is often benchmarked against this index too.

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The S&P 500, however, does have some quirks. In contrast to most big benchmark indices, it requires companies to have been profitable for four consecutive quarters to be eligible to join the index.  

The S&P 500 also has a committee, which decides on membership based on certain “qualitative” factors. This is globally unique, with other big flagship indices such as the FTSE 100, Cac-40 or Dax 30, not having such requirements.

For those looking to track the S&P 500, there’s no shortage of ETFs and index funds to choose from. Both Vanguard S&P 500 UCITS ETF GBP (LSE:VUSA) and iShares Core S&P 500 ETF USD Acc GBP (LSE:CSP1) charge just 0.07% a year. Generally, investors should avoid paying more than 0.15% to track the S&P 500.

There’s also the Dow Jones index, but it is much less popular with passive investors. This is due to it tracking just 30 stocks and using a price-weighting methodology. With this approach, company size isn’t taken into account. Instead, it’s the stocks with the highest share prices that have the biggest influence on the performance of the index.

Most major indices, such as the FTSE 100 and S&P 500, all use market-cap weightings, which rank companies by their size.

There aren’t many options to track the Dow Jones, and the fees are higher than tracking the S&P 500. One option is the iShares Dow Jones Indust Avg ETF USD Acc USD CIND, which costs 0.33% a year.

Active or passive?

When people say “markets are efficient”, what they usually mean is that the US market is efficient. The original work on market efficiency was based on the US market, which is also the case for many subsequent studies. The US market is the most watched in the world.

Thousands of professional investors and analysts pore over company results and monitor trends, meaning that US stock prices generally reflect the best approximation of fair value. So, there aren’t many undiscovered bargains.

This means that the US market is hard for active fund managers to beat. Over the past five years, the data shows that only a small number of US actively managed funds (16 out of a universe of around 225) have managed to beat the S&P 500 index. Those that have outperformed include BNY Mellon US Equity Income GBP E Acc (BD84208), JPMorgan American Ord (LSE:JAM) and Artemis US Select I Acc GBP (BMMV510), which are all identified as strong performers by our new Highly Rated Funds tool. That trio have gained 93.6%, 93.2% and 91.8% respectively versus 87.2% for the S&P 500 index.

Tech and small cap

Alongside the S&P 500, the Nasdaq is another investor favourite. It’s often referred to as a US tech index owing to its heavy weighting towards tech stocks. However, the Nasdaq itself is a stock exchange, with its name used by several indices tracking stocks that trade on it. The most important indices are the Nasdaq Composite and the Nasdaq 100.

Most ETFs available to UK investors mirror the Nasdaq 100, such as Invesco EQQQ NASDAQ-100 ETF GBP or iShares NASDAQ 100 ETF USD Acc GBP CNX1.

When it comes to the small-cap end of the US market, the most popular index is the Russell 2000. This index is made up of the 2,000 smallest companies in the Russell 3000 index. There are several potential ways that investors can track this index, including the Stt Strt SPDR® Russell2000 US SmCapETF GBP R2SC or L&G Russell 2000 US Sm Cp Qual ETF $ Acc GBP RTWP. There is also the MSCI USA Small Cap index, which can be tracked using iShares MSCI USA Sm CpCTBEnhESGETFUSDAcc GBP  CUS1.

One thing to be aware of is that the recent IPO of Space Exploration Technologies Corp Class A (NASDAQ:SPCX) means it has been included in the Nasdaq indices, but the company will not be included in the S&P 500 for at least a year.

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Actively managed fund options include Artemis US Smaller Companies I Acc GBP (BMMV576) and Schroder US Smaller Comp Z Acc (B7LDL92).

Smaller companies are less intensively researched by analysts, giving investors and fund managers who do invest in smaller companies greater chance of gaining an edge.

Another way to play the US stock market?

Over the past couple of years, the US market has become harder to beat due to the continued outperformance of a handful of large-cap tech stocks.

Companies including Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA), Amazon.com Inc (NASDAQ:AMZN), and Apple Inc (NASDAQ:AAPL), now make up a huge percentage of the index. They have also outperformed the broader index.

The so-called Magnificent Seven, which also includes Facebook-owner Meta Platforms Inc Class A (NASDAQ:META), Alphabet Inc Class A (NASDAQ:GOOGL), and Tesla Inc (NASDAQ:TSLA), now accounts for around a third of the S&P 500 and around 23% of the MSCI World Index.

As the weightings to those seven stocks rises, the performance of the index becomes more reliant on their fortunes.

An alternative option to reduce concentration risk is to consider index funds and ETFs that track an equal-weighted index, which holds each company in equal proportion. For example, an equal-weighted FTSE 100 index would have a 1% weighting to each constituent.

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One of the main benefits is that an equal-weighted ETF avoids being overexposed to stocks that have become overvalued or, worse still, potentially part of a bubble.

Another plus point of an equal-weighted index is that it offers more exposure to parts of the market that have performed less well in recent years. Going forwards, if there is a broader set of winners in US markets then this approach will, in theory, benefit more than the more traditional and common market-cap weighted indices.

The trouble is there’s much less choice of index funds and ETFs tracking an equal-weighted index. Examples on interactive investor include the Invesco S&P 500 Equal Weight ETF Acc GBP SPEX and Xtrackers S&P 500 EW ETF 1C.

If you own one of these ETFs, each individual share will generate 0.2% of the returns.

And remember before you invest internationally…

All foreign investors - including those in the UK – who would like to buy shares in individual US companies must complete a simple form called a W8BEN.

This form must be completed if you are intending to buy US shares within a trading account or ISA. You do not need to do this to trade US shares within a SIPP.

Completing the form reduces tax paid on interest and dividends on US shares to 15% from 30%. Once complete, the form will remain valid for three years before you need to renew.

This article was last updated on 20 July 2026.