2019 ETF Research Report, ETF Investing Tips, Global Share ETFs, Investing

Benefits of investing overseas with global ETFs

Investing in global ETFs can provide large diversification benefits for Australian investors.

There is growing interest in global share ETFs with 17 out of the 24 new ETFs launched onto the ASX over the last year being globally focused.


Why Australians have a ‘home country’ bias towards Australian shares

The Australian share market only makes up 2% of the global share market, but Aussie investors love their homegrown shares due to:

  • Comfort and familiarity with the Australian market
  • Concerns around exchange rate movements
  • Australia’s unique dividend imputation tax system
  • The high cost of buying international shares directly

Deloitte and the ASX recently highlighted that there is significant home bias in Australia with 75% of all investors only holding Australian shares.1

Vanguard research shows how reducing local country bias by adding global shares can lower the risk in your portfolio without sacrificing returns, due to reducing overall concentration towards certain companies and sectors.3


The light blue bar represents the % of the global share market each country represents. The darker bar represents the proportion a countries allocation to their local share market (i.e. the home country bias).

Getting the right allocation

Two questions we often get asked by clients about their global share allocations are:

  • What’s the right amount of global shares for my portfolio?
  • How much emerging markets shares should I own compared to developed market shares?

According to Vanguard, the portfolio that has given you the best mix of risk and return over the last 20 years has been split 52% Australian shares and 48% global shares. At Stockspot, we currently allocate between 52-70% of our share portfolio in Australian shares vs 30-48% global shares.

State Street Global Advisors (SSGA) suggests to allocate 10% of portfolios to emerging markets (EM), based on EM shares making up 10% of the world’s share market.4 Our emerging markets allocations are close to this number, currently between 8-12%.

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Diversification benefits of global share ETFs

The Australian share market is heavily reliant on a couple sectors and a few companies. Financial services (think CBA, ANZ, NAB, WBC) and Basic Materials (think BHP and RIO) collectively make up half of the Australian share market.

On the other hand, financials and basic materials only make up 21% of the global share market represented by the MSCI World index. That’s why its important for Australians to invest in companies that are operating in other sectors of the global economy, like technology and healthcare. These 2 sectors only make up a tiny 13% of the Australian share market but 31% of the world share market.


Sector Breakdown for the Biggest 100 Global Shares, The Australian Share Market (ASX 200), the World Share Market (MSCI World ex Australia), and the USA Share Market (S&P 500).

Think about some of the products you use everyday – the Apple iPhone, The Samsung Galaxy, Google, Johnson & Johnson Shampoo, and Nike shoes. ETFs provide a great way for investors to easily access these companies.

The largest holdings in the Global 100 ETF that we invest in are well known names like Microsoft, Apple, Amazon, JPMorgan, Johnson & Johnson and Alphabet (Google).

There are many investment opportunities that lie offshore where the markets have broader sectors, the companies are larger, and the economies have varied rates of growth and development.

We place a significant emphasis on asset allocation at Stockspot given it accounts for 90% of your return variability over time. Global share ETFs can help improve your asset allocation, overall portfolio diversification and reduce sector and country concentration risk.

Case study: SMSF growing interest in global share ETFs

Home country bias is evident in the portfolios of many SMSFs with global shares representing 15% of their overall portfolios.5 We expect SMSFs global share allocation to keep growing as a result of the broad range of global share ETFs available. SMSFs investing with Stockspot typically have 16-22% of their portfolios invested into global share ETFs.


Stockspot view

Australians will continue to gravitate to low-cost global share ETFs to diversify their share portfolios into other countries, sectors and companies. Two big benefits of a globally diversified share portfolio are exposure to high-growth companies in other parts of the world and less reliance on bank and resources shares for returns.

Find out how Stockspot makes it easy to invest in global share ETFs.

Sources:
1 ASX Australian Investor Study 2018
2 Vanguard: Home-bias investing: A global phenomenon (2017)
3 Vanguard: Approach to Constructing Australian Diversified Funds (2017)
4 SSGA SPDR Blog: Emerging Markets: Consider at Least a 10% Allocation (2018)
5 SuperConcepts Investment Patterns Sept 2018
6 Class SMSF Benchmark Report March 2019


Investment Associate

Marc has over 5 years experience in the financial services industry having previously worked for Morgan Stanley, AMP and KPMG. He holds a Bachelor of Business (Finance/Accounting) from the University of Technology Sydney (UTS), and has completed his Chartered Financial Analyst (CFA) Level 1.

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