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This article appeared in the June 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Want to own Google or Apple shares? Learn how to, via ASX.
By Brian Phelps, CommSec
Taking advantage of the growth potential in US companies - and lately the towering strength of the Australian dollar - has always been a little tricky and expensive. It has been left to larger and more sophisticated investors to exploit the opportunities, until now.
CommSec and Royal Bank of Scotland (RBS) have launched a new product that gives investors access to 35 of the biggest names traded on the New York Stock Exchange (NYSE) and NASDAQ. These include Berkshire Hathaway, Apple, Google, Wal-Mart, 3M, Cisco Systems and Kraft Foods.
The new product, called Exchange Traded International Securities (ETIS), gives exposure to international shares without the extra costs and paperwork of trading directly in international markets. Unlike an exchange traded fund (ETF) where the investment is in a basket of shares, each ETIS is directly linked to an individual share.
You can trade an ETIS on ASX just like any other listed company's shares, in Australian dollars during Australian trading hours.
Trading in Australian dollars means that if you buy, say, a number of Google ETIS, your holding gives exposure to the same number of individual US shares in Google, which are listed on NASDAQ in US dollars. If the price of Google shares increases, your Google ETIS will also increase. And vice versa. For example:
- If Google's last sale price on NASDAQ was $US500, and the A/US exchange rate was $0.90, the fair value of the Google ETIS (ETISGOO on ASX) would be $555 (calculated by dividing the US share price by the exchange rate: 500/0.90).
Any changes in the exchange rate affect an ETIS. If the value of the US dollar falls against the Australian dollar, the ETIS price will increase, and vice versa.
Apart from the risk of a decreasing share price or a fall in the Australian dollar, there are other risks with ETIS. The product is issued by Royal Bank of Scotland and depends on its ability to fulfil its obligations. This is known as counterparty risk. Liquidity may also present a risk; as with any security, the fair buy or sell price may not be achievable if investors are not buying or selling.
In line with ASX regulations, RBS provide buy and sell prices to ensure liquidity in each ETIS. This ensures the ETIS will not move materially from a fair value of the US share.
What happens to dividends?
Although there is a link between an ETIS and its underlying share (a Google ETIS should rise and fall in line with a Google share on NASDAQ), an ETIS investment is different to a direct investment in the actual share. For example, ETIS investors do not have any voting rights or rights to dividends or distributions.
Many of the popular US listed companies, such as Berkshire Hathaway, Apple and Google, do not pay dividends, because of double taxation in the US. By Australian standards, US companies pay relatively low dividends and therefore they are often more attractive to investors seeking capital gains rather than income.
Where companies do pay dividends, ETIS investors receive an income amount indirectly. RBS first deducts 15 per cent withholdings tax and pays it on the investor's behalf to the Australian Tax Office. Fifty per cent of the remainder of the dividend is paid to the investor in Australian dollars, removing the hassle of exchange fees on dividends. The other 50 per cent is retained by RBS to cover the costs of issuing and maintaining the product. If dividends are not paid, no fee is charged.
The only other fee is brokerage when buying and selling.
How to get started
If you are already registered with CommSec there are no new accounts to set up or forms to complete. You can buy and sell in the same way as any other ASX Listed share using your existing trading account and hold the ETIS on the CHESS settlement system.
ETIS have a 10-year term from listing date but every five years you can choose to receive the underlying share or cash in Australian dollars. If you do nothing, your ETIS rolls over into a new ETIS and term.
An ETIS may suit you if:
- You believe there is growth potential in any of the 35 US companies listed as part of the ETIS product.
- You are prepared to be exposed to foreign exchange rate movements.
- You do not want to set up and maintain an international account to trade US shares directly.
As always, diversity is the key to reducing risk in a portfolio and ensuring a more robust investment return. As with any new investment, do your research. Check the list of the 35 US companies offered as part of the ETIS product and make sure you understand the markets, outlook and values of the companies you are interested in.
These ETIS are currently available on ASX.
|US Company||ETIS ASX code||US Exchange code|
|American Express Co||ETSAXP||AXP|
|Bank of America Corp||ETSBAC||BAC|
|Berkshire Hathaway Inc-CL B||ETSBRK||BRK.B|
|Cisco Systems Inc||ETSCSC||CSCO|
|EI du Pont de Nemours & Co||ETSDUP||DD|
|Exxon Mobil Corp||ETSXOM||XOM|
|General Electric Co||ETSGEL||GE|
|Google Inc - CL A||ETSGOO||GOOG|
|Home Depot Inc||ETSHDP||HD|
|International Business Machines||ETSIBM||IBM|
|Johnson & Johnson||ETSJNJ||JNJ|
|JPMorgan Chase & Co||ETSJPM||JPM|
|Kraft Foods Inc||ETSKFT||KFT|
|Merck & Co Inc||ETSMRK||MRK|
|Procter & Gamble Co||ETSPGB||PG|
|Travelers Cos Inc||ETSTRV||TRV|
|United Technologies Corp||ETSUTX||UTX|
|Verizon Communications Inc||ETSVZC||VZ|
|Wal-Mart Stores Inc||ETSWMT||DIS|
|Walt Disney Co||ETSDIS||DIS|
About the author
Brian Phelps is general manager, CommSec Distribution, and head of investment lending. His teams specialise in helping CommSec clients develop and maintain share portfolios, margin loans, international share accounts and derivative trading instruments. More information about ETIS.
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