Global diversification through ETFs

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.

If you would like to discuss anything in this article, please call us on 07 5444 0675.

 

Sources:

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2016 Vanguard Investments Australia Ltd. All rights reserved. 

Important:

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide.