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The easiest and most cost effective way to invest in foreign markets

The Australian equity market represents less than 5% of the global market, so for diversification purposes investing offshores makes a lot of sense.

One of the biggest markets of course is the US market. It is more than 10 times the size of the Australian market-by-market capitalisation, so of course there are going to be a lot more opportunities there.

The US market is a lot more diversified across the different market sectors. The S&P/ASX 200 has close to a 40% allocation to financials, including A-REITs, but for the S&P 500 and the Dow Jones that allocation is less than 20%.

The difference is also stark when it comes to the information technology.

If you want real exposure to IT you have to go overseas. Our market has a less than 1% allocation to IT while the S&P 500’s allocation is nearly 20%. And of course the US warrants its own benchmark for technology companies – the NASDAQ. 

Buying direct 

There are many ways to invest internationally and find some global opportunities. Of course you can buy the shares directly. Some local brokers offer access to a variety of international markets but the brokerage cost is usually more expensive than it is for local shares. There is also the issue of research and understanding the many different international markets. 

Also if investing in the US, investors need to complete a W-8BEN form – a form from the US Department of Inland Revenue, which certifies you’re not a US resident to make sure that extra tax is not deducted from income earned in the US.

ETFs

Local investors also have access to international exchange traded funds on the local market. These are basically a basket of shares as represented by a particular index but an investor can buy into them for fraction of what it would cost to buy all the shares they represent. An investment in the SPDR S&P 500 ETF Trust (SPY), for example, is an investment in all the shares represented in that index. 

However the options available in Australia are limited to major market indices and ETFs, by nature, are passive investments. You are investing in the overall performance and because there is little choice you are often unable to make a bet on a particularly sector or sub-sector.

Thematic investing

Another way to invest internationally is to invest by themes. The world is a big place, and so by extending this approach to investing on a global scale, investors have more opportunities to take advantage of the latest trends.

Some investing platforms and operations take a more active approach to investing and do the hard work for the investor. They research and select global stocks that belong to a particular theme. That means it’s possible to invest in a range of stocks in sub-sectors such as cloud computing or Chinese infrastructure, in just one click for a single entry price. 

The investor just has to make the decision on which theme they want to follow.  

Here are some examples of global thematic portfolios;

·      Chinese infrastructure giants

As the country keeps growing, essential infrastructure and utilities services will be required, which means companies in these sectors will benefit.

·      Cyber security United States

With crime moving online, businesses and governments are spending more money to protect their IT infrastructure and companies in the business of providing cyber security are expected to experience fast growth.

·      Solar power United States

Climate change is real and solar power is an environmentally friendly and popular technology that will have huge long-term benefits. US companies are working on some of the most advanced technology in this space.

·      Driverless cars United States

A selection of United States listed technology and auto companies that are working, or involved, in the process of driverless transportation. Many experts believe the proliferation of these vehicles may come as soon as 2020. This will have wide implications for the auto industry, insurance, real estate and many other parts of the economy.

·      Defence United States

A selection of companies, that will benefit from an increase in military spending and defence budgets as tensions grow worldwide. War and conflict have unfortunately been an integral part of human civilisation since the beginning of time, a fact which seems unlikely to change any time soon.

To find our more for this approach to international investing, register for our Thematic Investing webinar on 28th October.

 

 

 

Published on: Tuesday, October 27, 2015

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