Investing from the UK

 suggests some approaches and funds that enable a UK (tax-resident) investor to invest using similar techniques to those outlined in the Bogleheads' Guide To Investing. The book contains sample portfolios for investors of different ages that use different stock market and bond mutual funds. This article offers some ideas for creating UK versions of these sample portfolios.

This article is not intended for 'US taxable persons'. This includes US citizens in the UK, even if they are also UK (or any other non-US) citizens, for example dual UK/US citizens and 'accidental Americans'. It also includes US 'green card' holders, even if the card has expired for immigration purposes. Anyone subject to US tax laws should not follow the suggested approaches shown below should instead see the article specific to their situation.

General approach
The funds listed below are low cost indexed funds. In the UK these can be unit trusts, Open-Ended Investment Companies (OEICS), or Exchange Traded Funds (ETFs). A few UK based companies offer low cost indexed unit trusts directly to the investor. Vanguard, HSBC Asset Management, Fidelity, and Legal and General all offer funds with low expense ratios. Vanguard UK funds are available directly through Vanguard's UK web site, and also more generally through IFAs and most investment platforms. There are few indexed bond funds, but bond ETFs, as well as stock ETFs, are available from iShares and Vanguard. Investment platforms may levy a fee for fund transactions.

From the investor perspective, unit trusts and OEICs operate identically. Both are broadly categorised as "funds' to distinguish them from ETFs. Over time, many unit trusts have converted to the newer OEIC legal structure. Some investment platforms charge more for funds than for ETFs but offer free fund trading; others charge the same, but have a fund trading fee.

ETF purchases must be made through a broker or investment platform, and there is usually a per transaction cost. However, there can be a useful saving in trading costs where a platform offers a regular purchase feature.

Full fund and ETF details, including factsheets and annual reports, can be found at sites such as Morningstar, Financial Times Funds, and Trustnet.

Funds and ETFs
The following are some examples of low cost indexed funds and ETFs, but these lists should not be regarded as complete.

UK funds usually use the term ongoing charge, often abbreviated to OCF, to mean the fund's expense ratio. The links to funds below generally reference income or distributing share classes, but for most funds, and some ETFs, accumulation share classes will also be available (see the Taxes section for more). Any fund that describes itself as a tracker is simply one that tracks a given index (an 'index fund', in other words).

Stocks
To be properly diversified, the UK investor might pair UK FTSE 100 or FTSE 250 indexed funds with a world indexed fund or a selection of regional non-UK funds. UK stocks are a component of most world funds, leading to overlap if combined with UK funds. An ex-UK world fund can reduce this problem.

UK stock indexes
This section suggests funds that cover the entire UK stock market to maximise diversification. For advanced investors, looking for more fine-grained choices, see the Advanced funds section.

Ex-UK and global indexes
These funds cover wider stock markets. Global indexes cover the world's markets, including a UK component. Ex-UK funds cover stock markets except for the UK and are useful for combining with UK index funds to achieve your own choice of home bias.

Developed world indices track about 85% of the world's market by excluding emerging markets. This makes their cost lower than a full world tracker

UK bonds
UK investors may generally prefer bond funds that are denominated in pound sterling. The term 'gilts' refers to bonds issues by the UK government. UK government bonds that provide inflation-linked returns are termed 'index linked gilts'. Non-government bonds are usually termed 'corporate bonds'.

Global bonds
Vanguard recommends using global bond funds that are hedged back to local currency, in this case, pound sterling (GBP). This choice maximises diversification of bond exposure, while mitigating fluctuation due to currency movements.

All-in-one funds
Vanguard offers a range of "LifeStrategy" funds that automatically rebalance across asset classes. These may offer a single fund solution to creating a well diversified portfolio.

Sample portfolios
Listed below are UK equivalents to some of the sample asset allocations outlined in the Bogleheads' Guide To Investing. These are appropriate for different stages in life. "Home country bias" describes some investors' preference for investing in local markets over non-local ones.

Implementation
A UK investor can use the low cost funds and ETFs listed earlier to create a portfolio that matches their selected asset allocation. If a portfolio uses a world fund or ETF that includes UK stocks (one that is not ex-UK) there will be some overlap in the funds, so the allocations to each fund needs to be slightly adjusted. The UK accounts for around 5% of the MSCI World Index.

An investor might 'synthesize' a global fund by combining appropriate regional funds. For example, mixing 66% US fund, 18% Europe ex-UK fund, 9% Japan fund, and 7% Far East ex-Japan fund approximates a World ex-UK fund. A combination like this can sometimes have an expense ratio lower than that of the global fund it replaces.

If a "LifeStrategy" fund has an asset allocation is close to an investor's selected asset location, the investor might use a single "LifeStrategy" fund, or a combination of these funds, in place of multiple funds covering different asset classes. These funds have the added advantage that they rebalance automatically.

A brokerage account or fund platform is often the simplest way for UK investors to easily purchase and hold unit trusts and ETFs. A discount brokerage (sometimes also known as an execution-only stockbroker) is a good choice, and there are several low-cost and online discount brokerages operating in the UK. Vanguard, Hargreaves Lansdown, AJ Bell, Interactive Investor and Halifax Sharedealing (including its iWeb and Lloyds Sharedealing Direct divisions) are popular ones. For people with international lifestyles, Interactive Brokers (IBKR UK) can be a useful choice.

Taxes
Some of the tax management strategies mentioned in the Bogleheads' Guide To Investing and other US literature have no relevance to UK investors. UK funds do not pass capital gains on to investors, and UK investors are not liable for capital gains tax on unit trusts or ETFs until the asset is actually sold, so there are no UK 'tax managed' funds.

UK investors have a capital gains tax allowance, meaning that rebalancing is often possible at no tax cost even if some gains have no offsetting losses. UK investors can set capital losses against capital gains but not against ordinary income tax, so there is no additional advantage from tax loss harvesting. The capital gains allowance cannot be carried across tax years, so UK investors should try to use as much of it as is possible, up to the limit, by realizing gains where appropriate. Once a gain is realized on a sale, the same holding cannot be re-purchased within 30 days, but a similar (but not identical) replacement can be purchased.

UK investors do not need to closely consider timing unit trust or OEIC purchases around ex-dividend dates. Where an investor holds fund units for less than the dividend period, some of the next dividend paid will be classified as an 'equalisation'. This is a return of capital, and UK investors are not liable for tax on this portion of the dividend.

Most unit trusts and OEICs and some ETFs provide two distinct types of units or classes of share: accumulation (or accumulating), and income or distributing. Accumulation units or shares retain dividend distributions within the unit price, in effect automatically reinvesting them. Income and distributing units or shares pay out dividends as cash. The tax treatment of both paid and accumulated dividends is identical for a UK investor. UK investors might prefer income units or shares in ordinary taxable accounts, as dividends can be used for rebalancing without the complicated capital gains tax calculations that could arise from sales, and also avoid potential cash-flow problems where tax becomes due on accumulated (but not yet received) dividends. Accumulation units or shares are useful for long-term holdings in a pension or ISA wrapper, where capital gains tax is not an issue.

Investors who hold ETFs or non-UK domiciled unit trusts or OEICs outside of tax-sheltered wrappers need to be aware of the potential for "Excess Reportable Income" (ERI). This is undistributed income that is nevertheless deemed to be UK taxable. Amounts are often, but not always, relatively small, and sometimes difficult to uncover. ERI is not a problem in a pension or ISA wrapper.

Also, note that outside of tax-sheltered wrappers, dividends paid by Ireland and other non-UK domiciled UCITS funds and ETFs are classified as foreign dividends in the hands of a UK investor. This can lead to a difference in the way these dividends need to be handled for tax reporting, although generally no difference to the final and actual tax liabilty.

Pension and ISA wrappers
The portfolios outlined above, and the example funds and ETFs listed, work equally well both for ordinary and for tax advantaged investments. Tax advantaged investments in the UK are, most commonly, pensions (including both employer and UK personal pensions) and UK Individual Savings Accounts (ISAs).

For ISAs, a UK investor can hold funds or ETFs inside a self-select ISA wrapper. These wrappers are offered by almost all discount brokerages or fund platforms, and usually operate like a normal trading account with a few added features and limitations (for example, a limit on the total amount that can be contributed in a single year, in line with annual ISA allowances).

For pension savings, a UK investor can hold funds or ETFs inside a Self Invested Personal Pension (SIPP) wrapper. Many of the usual discount brokerages offering trading and ISA accounts also offer SIPP accounts, and though there may be a few extra restrictions on what investments an investor may hold, SIPP wrappers generally operate like both ordinary trading accounts and ISA wrappers.

For account balances where a SIPP is impractical, UK investors might instead use a personal pension scheme or a stakeholder pension scheme. These usually offer a limited range of funds, and have capped fee structures. These pensions are generally not as flexible as a SIPP, but can be cost effective for low balances when weighed against annual SIPP administration fees. The funds listed above may not be available directly from these plans, but in these cases it is usually possible to find index and tracker funds within the plan that can be substituted.

Fidelity, Hargreaves Lansdown, AJ Bell, Interactive Investor, and Halifax Sharedealing (including its iWeb division) all offer both offer ISA and SIPP wrappers. Vanguard also offers ISA and SIPP wrappers, but unlike other platforms, it restricts investment choices to only Vanguard's own funds and ETFs. Lloyds Sharedealing Direct offers ISA wrappers but not SIPPs.

Interactive Brokers (IBKR UK) offers both SIPP accounts and ISA accounts.

Advanced funds and ETFs
For investors looking for more fine-grained control over their investments beyond the typically suggested three or four fund portfolios, this list may be of interest. Note that these lists are not well maintained so it may be better to research separately at other websites.

The UK stock market splits broadly into the large-cap FTSE 100 Index and mid-cap FTSE 250 Index. It is significantly smaller than the US and not as diversified. For example, three companies (Shell, BP and HSBC) comprise nearly 25% of the FTSE 100 Index.

Web sites and discussion forums

 * Morningstar, UK fund and ETF information and research
 * Financial Times Funds, provides comprehensive fund and ETF information
 * Trustnet, fund and ETF information
 * The Lemon Fool, Shares, Investment and Personal Finance Discussion Forums
 * MoneySavingExpert, comprehensive money information, includes a discussion forum
 * Monevator, blog site focused on index and passive investing