How to buy the world with ASX ETFs

Photo of Meaghan Victor, State Street Global Advisors By Meaghan Victor, State Street Global Advisors

min read

With thousands of international stocks, the opportunity is too big to ignore.

Despite the potential benefits of diversifying offshore, many Australian investors have a minimal allocation to global equities in their portfolio.

At first blush it may seem sensible to stick to Australian equities, but they represent less than 2.4 per cent of the global stockmarket capitalisation.

The proliferation of exchange-traded funds (ETFs) has provided access to a wide range of global sectors and companies such as Apple, Facebook, Boeing and Coca-Cola in a single trade on ASX.

So, what is holding Australian investors back with global shares?

Here, we address three common concerns of investors about investing in international equities.

1. "You can diversify your holdings in Australia. Why bother with the extra expense in investing internationally?

Investors can build diversified portfolios of Australian stocks, but ultimately, they are still Australian stocks. Although many of our companies operate globally, most will still be impacted by what happens at the local level. If the local economy deteriorates or does not expand as fast as some key international markets, local equities may underperform.

Additionally, the local market is heavily tilted towards stocks in two sectors, resources and financials, which together account for more than half the market capitalisation of the S&P/ASX 200 index.

With international stocks, investors can gain greater exposure to sectors such as utilities, consumer staples and healthcare, and high-growth sectors such as technology that are relatively underrepresented in the Australian broad market.

Investing internationally does not necessarily equate to higher expenses. Through an ETF, investors can gain exposure to perhaps the most famous index of all, the S&P 500 in the US.

Many of the companies in it are household names — Apple, Facebook, General Electric and Johnson & Johnson, to name a few — and through an investment in a passively managed ETF, investors can gain broad market exposure to the US market in a single trade.

There are also several ETF options for investors looking to invest globally, in developed and emerging markets.

2. "I won’t have heard of all the companies in the international funds. Should that be of concern?"

ETFs bring a level of transparency that is arguably unmatched in the investment industry. Investors can see what the ETF holds daily and where the funds are invested. While there may be companies in international ETFs that local investors will not have heard of, there will also be well-known companies that are very familiar.

In any case, one of the attractions of investing internationally via an ETF is the broad market exposure offered. Investors are not reliant on the performance of a handful of stocks; rather, they have exposure to hundreds or even thousands of companies, some well known, others not.

3. "The foreign exchange market may turn against me, why risk it?"

Currency movements are notoriously difficult to predict, particularly in the short term, as markets are influenced by a range of factors, some fundamental, others based more on the prevailing sentiment. Investing internationally does expose investors to the risk of adverse currency movements, but that alone should not be a reason to avoid the markets.

The benefits from diversification or the potential for solid returns over the long term may outweigh the risks associated with currency movements.

For those who are particularly concerned about the impact of a strengthening Australian dollar on their returns from international equities, SPDR ETFs offer a currency-hedged version of its global equity ETF, the SPDR® S&P® World ex-Australia (Hedged) Fund (ASX: WXHG).

In summary

By using ASX-quoted ETFs to broaden portfolios, to include an allocation to international stocks, Australian investors can:

  • Expand their opportunity set. By investing in global equities, investors can gain exposure to a much more diverse range of companies that are representative of today’s dynamic global economy.
  • Increase diversification. Investors can build diversified portfolios of Australian stocks, but at the end of the day they are still Australian stocks. In addition, the local market is tilted towards stocks in two sectors, resources and financials.
  • Reduce concentration risk. Through an investment in international equities, investors can spread their risk across many different companies, sectors and countries. Rather than relying on a single economy, which in the case of Australia is relatively small in global terms, investors gain exposure to markets around the world.

ETFs can be a highly effective way to tap into the growth potential of international equity markets, without the complexities of a direct investment or challenges of a managed fund.

With a range of international funds, investors can tailor their exposure using State Street SPDR ETFs, across US, emerging markets and global equities, or thematic ETFs such as global income and global real estate.

About the author

Meaghan Victor is a vice-president of State Street Global Advisors (SSGA). She is head of SPDR® ETFs Australia.

From ASX

Learn about the features, benefits and risk of ETFs with the free ASX online course, Exchange-Traded Funds and Exchange-Traded Products.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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