Investors are increasingly using Exchange Traded Funds (ETFs) as a straightforward, low-cost way to gain exposure to overseas shares.
Recent ASX research shows that 40.9 per cent of assets in Australian-listed ETFs are in global shares, closely followed by Australian equities with 39.5 per cent, as at 31 May.
A fundamental decision for Australian investors is to consider how much of their portfolios should be exposed to overseas shares when setting the asset allocations for their portfolios.
Research has long shown that asset allocation is the primary determinant of a portfolio’s return viability and long-term performance. (The main asset classes are, of course, being local shares, international shares, property, fixed interest and cash).
When considering how much of their portfolios to direct into overseas shares, investors should keep in mind:
- The Australian market is highly concentrated with a large representation in the financial services and resource sectors. (The top 10 Australian companies make up about half of the S&P/ASX 300 Index, with four out of the top five companies in the financial sector.)
- Investing in a global equity fund that tracks the MSCI World Index (ex Australia), for instance, is a means to invest in the world’s best-known brands. (The top 10 companies in the index are Apple, Exxon Mobil, Microsoft, Johnson & Johnson, General Electric, Amazon, AT&T, Facebook, Nestle and Procter & Gamble.)
- The MSCI World (ex Australia) Index comprises almost 1,600 companies listed on the exchanges of 22 of the world’s major developed economies.
Critically, investors using ETFs can easily rebalance their portfolios – including their exposure to overseas shares – in order to remain in line with their long-term strategic or target asset allocations.
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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. |
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