A Powerful Case For Global Shares Exposure
A special report in The Economist magazine this month refers to the flow of data from information technology as the “world's most valuable resource”. Whether you agree or not with this tag, the rising financial and social influence of the world's heavyweight IT corporations is undeniable.
As The Economist stresses, five of the “titans” that “deal in data” – Alphabet (Google's parent company), Amazon, Apple, Facebook and Microsoft – are the five most valuable listed companies in the world in terms of market capitalisation. Their combined net profit for the first quarter of this year alone was more than $US25 billion.
Australian investors are increasingly recognising that index-tracking Exchange Traded Funds (ETFs) provide a straightforward, low-cost means to gain exposure to such global heavyweights and to ensure that their portfolios are appropriately diversified in international stocks.
At the end of April, 40 per cent of assets in Australian-listed ETFs were in global equities, followed by Australian equities with 38 per cent.
With a single trade in an ETF tracking, say, the MSCI World Index (ex Australia), an Australian investor can gain exposure to the almost 1,600 companies listed in 22 developed markets.
Investing in a global equity fund that tracks this index is a means to invest in the world's best-known brands. Its top 10 companies are currently Apple, Microsoft, Amazon, Facebook, Exxon Mobile, Johnson & Johnson, JP Morgan Chase, Alphabet C, Alphabet A and Wells Fargo.
Despite the dominance of information technology stocks in its top 10, the MSCI World Index (ex Australia) is widely diversified in sectors – a critical consideration for investors wanting to create a properly-diversified portfolio with sufficient international exposure.
The index's sector split as at April 28 was: financials (17 per cent), information technology (16 per cent), consumer discretionary (13 per cent), health care (12 per cent), industrials (12 per cent), consumer staples (10 per cent), energy 6 per cent), materials (5 per cent), utilities (3 per cent), telecommunication services (3 per cent) and real estate (3 per cent). US-listed stocks occupy 61 per cent.
By contrast, the Australian market is highly concentrated in financial and resources. The financial sector makes up 36 per cent of our local market with resources taking up another 15 per cent, again as the end of April – more than half in only two sectors. Information technology accounts for just 1.7 per cent. And the five biggest stocks in terms of capitalisation for the four big banks and a resource company (of course, BHP Billiton).
Investors who confine themselves to the Australian market may be carrying a much riskier equity portfolio than they perhaps realise. The good news is that broad international equity exposure is so readily obtainable – even with a single trade.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.