How to Invest in the U.S. Stock Market Without Getting Caught in the AI Bubble

The US stock market remains the giant of global investing — too big, too influential and too deeply woven into portfolios to overlook.

America’s equity market is now worth more than the next nine largest stock markets put together, with its latest surge powered by the rapid rise of artificial intelligence and booming demand for semiconductors.

Yet that extraordinary run has also sharpened concerns that share prices could fall sharply if enthusiasm around AI proves overblown and the market’s technology-led rally begins to unravel.

Ben Yearsley, director at investment research group Fairview Investing, calls the United States “the most expensive market”, as well as “the most entrepreneurial” and “the hardest to beat”.

His view is that investors cannot afford to ignore Wall Street — but they do need to approach it with care. “You need the US in your portfolio, but you have to be clever about how you play it,” he says.

For anyone holding a mainstream global index tracker fund, or a workplace pension invested in one, exposure to America is likely already substantial: roughly 70p in every £1 is typically allocated to US-listed companies.

UK investors have also become far more dependent on the US market over the past ten years. Data from the Investment Association shows the average share of their money invested in American assets has doubled, climbing from 20 per cent to 40 per cent.

Darius McDermott of FundCalibre says: ‘Now may be the most dangerous time to access the US market, as fears grow of a potential earnings bubble.’

Martin Connaghan, co-manager of Murray International Trust, believes it will be difficult for the US market to sustain its current level of growth given its reliance on foreign capital.

He says: ‘History provides a cautionary parallel – Japan once represented an outsized share of global equity markets at its peak, before experiencing a prolonged period of decline.’

So should you be investing in the US market at all?

The overwhelming majority of experts will say you should, but avoid having too much of your portfolio in the AI-driven stocks.

You also need to ensure that you understand the rules around investing in US stocks.

Individual shares

It has never been cheaper or easier to invest in individual US stocks such as Apple, Alphabet or Tesla, but you’ll need to fill in a form called a W-8 BEN, which confirms your status as a non-US person for tax purposes. 

Most investment platforms allow you to do this online.

Bear in mind that buying US shares comes with currency risk as they are priced in US dollars. 

This can add to share price volatility as your returns will depend on the strength of the pound against the dollar as well as the performance of the actual share.

US shares tend to have much higher individual prices than in Britain – Apple, for example, is currently just over $300 – but some platforms allow you to buy a fraction of a share instead.

Tracker funds

Funds that track an index get exposure to the whole US stock exchange in a far cheaper way.

Vanguard’s US S&P tracker is one of the most popular, with $1 trillion invested, Yearsley says. It charges just 0.07 per cent.

But to reduce over-exposure to the big beasts, an alternative is to buy an equal-weighted fund.

The fund holds the same stocks as a normal passive tracker – so an S&P 500 fund tracking the US’s largest stocks would hold all stocks that are in the index – but instead of holding them in proportion to their market capitalisation, the equal-weighted fund holds an equal amount of each stock.

Jason Hollands, of online investing platform Bestinvest, says that using a fund like this would have mitigated losses when the dotcom bubble burst in 2000, so it could also give you some protection against a similar AI crash.

Specialist funds

These are run by a manager who picks investments, and will take you into niche areas where there’s – hopefully – value to be had.

Yearsley, at Fairview, recommends Polar Global Insurance, which is 70 per cent invested in the US but has very little crossover with the S&P 500.

‘It’s extremely consistent and very dull,’ he says. It has returned a far from dull 45 per cent over the past three years.

In a more exciting vein, he also likes Barrow Hanley US Mid Cap Value, which he says ‘gives you exposure to the vibrant US economy without just buying tech and AI’.

Another way to invest in the US in a less risky manner is to prioritise funds that invest in stocks paying income via dividends. This can give more consistent returns.

McDermott suggests JPM US Equity Income, which he says favours some sectors that have been overlooked amid the AI-driven rally.