Looking to increase your portfolio diversification and uplift your potential returns?
Investing internationally is often seen as a great way to achieve these goals.
Diversification benefits occur when a portfolio is made up of low correlated assets across various markets and sectors. This is quite hard to achieve if you are only invested in one market, especially if it is concentrated by only a handful sectors. In addition, by exposing your portfolio to a variety of sectors, your potential return may be greater if you are able choose the right investments rather than having your funds allocated to an underperforming one.
With that being said, investing offshore seems like a no brainer as it solves the diversification issues that Aussie investors face whilst also opening up a world of opportunities. However, before making the leap, there are some key considerations you must address and be aware of before making any investment decisions.
Ways to invest
There are several ways to gain exposure to international stock markets – the most common are directly investing in stocks or through an internationally focused exchange-traded fund (ETF). A ETF is a type of fund that owns underlying assets (e.g. shares, bonds, commodities, etc.) and divides ownership of those assets into shares and are traded on an exchange. The advantage of using an ETF is that investors get the diversification of an index fund at a much lower cost than if they were do invest directly into a mutual fund. Furthermore, by opening the doors to international exchanges, you will be greeted with a much larger variety of ETF options to choose from than what the ASX has to offer.
On the other hand, purchasing foreign stocks directly is the most obvious way to gain global exposure. This is a much more active approach than using an ETF, as you are in complete control of your investment decisions. This process requires you to do your due diligence so that you understand the fundamentals of your specific investments, and can be very rewarding if you are able to choose the right investments.
One of the biggest barriers to investing in international markets are the transaction costs associated. These costs will vary depending on the broker you are using to execute your trades and which foreign market you are investing in. Typically, brokerage commissions are almost always higher in international markets compared to domestic rates. Fortunately, at Monex Australia we pride ourselves on providing easy access to international markets at a fair price through our competitive brokerage rates.
In addition, on top of the brokerage commissions, there may be various additional charges which may be specific to a certain market. These charges may include stamp duties, levy tax, trading fees, clearing fees, etc.
Below we break down the cost of purchasing shares in the U.S., Hong Kong and South Korean markets using Monex Australia as your broker.
|Fee Type||United States||Hong Kong||South Korea|
|Brokerage Commission||0.10% (Min USD 9.99)||0.10% (Min USD 12)||0.30% (Min KRW 25,000)|
|Stamp Duty||n/a||HKD 1.00 per HKD 1,000 gross||n/a|
|Remittance Charge||n/a||n/a||KRW 30,000|
|Total||0.10% (Min USD 9.99)||0.1177% (Min USD 12) +stamp duty||0.30% (Min KRW 25,000) + KRW 30,000|
|AUD $10,000 Investment (approx.)||USD $9.99||USD $22.00||USD $51.00|
*Figures are approximate based on market exchange rates 02/13/2018)
As the table illustrates above, depending on the rules of the local market you may be subject to various fees and charges which you may not be used to when investing domestically. These fees may add up over time, so it is important to consider them when investing into foreign markets.
Currency movements are important to consider when investing offshore. This is because you must exchange your domestic currency into the local currency of the market you wish to buy, and vice versa when you sell. Therefore, depending on how long you hold the stock for, the exchange rates used may differ from when you buy and sell and this may affect your overall returns.
For example, let’s say you purchase Facebook (FB) shares in the US market and the exchange rate at the time is AUD/USD 0.78 and you hold them for a year. When you are ready to sell, the exchange rate may be AUD/USD 0.85, which means the AUD has appreciated against the USD. This may negatively impact your trade, as the USD has weakened against the AUD, and your stocks are held in USD and therefore may amplify your losses or cut back your profits. On the other hand, at the point of Sale, if the exchange rate is AUD/USD 0.74, your trade will benefit as you are making a gain on currency on top of any capital gains/loss from the stock.
Furthermore, the movement of currencies could potentially be used to an advantage if done correctly, and investing offshore may lead to such opportunities. By investing in offshore markets, you are given much more exposure to the markets and sectors that are benefiting directly from fluctuations in exchange rates; whereas some of these sectors in the local market may limit your investment to only a handful of stocks. A great example to consider may be a company which conducts a large part of its sales in the Japanese Yen and distributes its products to the United States. As the JPY has strengthened relative to the USD in recent months, the sales would be effectively worth more to this company relative to US dollars as the currency has appreciated, and this creates greater shareholder value.
Investing into foreign stock markets is a great way to gain exposure to various opportunities that the domestic market may not present. By doing so, you are able to diversify your portfolio into various sectors and industries and also gain potentially higher returns. However, for the average investor, navigating through global markets may seem challenging due to the various risks associated and difference in structure which they may be used to when only investing domestically. By understanding some of the main risks and concerns, an investor is better positioned to minimize these risks and make informative investment decisions.