In the year 2017, the EWA, an ETF (Footnote #1) which tracks the performance of Australia’s share market has grown by 19.9%. Although this is a reasonably sound return on investment, the global average over the year 2017 was 29%, where South Korea’s (EWY) ETF saw a return of 49.2%, Hong Kong (EWH) a return of 36.5% and China (FXI) 36.2%. Australian investors are known to have a “home country bias” when it comes to picking stocks, where on average, an Australian equities portfolio is made up of 66% (Footnote #2). Australian shares. As such, by allocating a high portfolio weight into domestic stocks, Australian investors may be missing out on potential gains presented by international markets, as well as the benefits of having a more diversified portfolio.
- An exchange traded fund, or ETF is a marketable security that owns its underlying assets (stocks, bonds, currency, etc.) and divides ownership of those assets into shares. Unlike mutual funds, an ETF trades like a common stock on a stock exchange, and experiences price changes as they are bought and sold.
- Vanguard research
Figure 1: Country ETFs: 2017 Total Returns (in US $)
|Country||Ticker||2017 YTD||Country||Ticker||2017 YTD||Country||Ticker||2017 YTD|
|Greece||GREK||34.8%||New Zealand||ENZL||24.1%||Saudi Arabia||KSA||6.2%|
Source: Charlie Biello, Pension Partners
Home Country Bias
Home country bias in this context refers to the tendency for investors to hold a significant portion of their portfolio in domestic equities. Australian investors have shown a stronger home country bias than many other developed countries, where 66% of Australian shareholders hold only domestic shares.
Figure 2: Equity Market Home Country Bias
Source: Based on Vanguard Research 2016
Why do Australian investors prefer to invest domestically?
There are a number of factors that contribute to Australia’s home country bias. Common reasons such as familiarity, currency concerns, better return expectations and lower investment costs are consistent across other markets. However, the main factors which cause home country equity bias in Australia are the higher costs of entry (brokerage costs) to international stocks compared to accessing the Australian share market. Other reasons are due to its tax system and the performance benefits associated with the dividend imputation system – Australian investors place a higher value on companies which pay dividends with imputation (franking) credits attached to them. These credits are particularly attractive to superannuation investors, as it helps them increase the value of their dividend due to the lower tax rate on superannuation investments. With that being said, although Australia provides desirable tax concessions, the Australian equities market accounts for approximately 2.4% of the global equity market . Therefore, investors who are only investing domestically are not only limiting the benefits associated with diversification, but are also missing out on many opportunities in the global equity markets.
Why should I invest internationally?
The main benefit of investing internationally is portfolio diversification. Diversification is a risk management technique which seeks to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others. Ultimately, the aim of diversification is to ensure certain shocks to a specific section of your portfolio does not affect the other sections, where your gains/losses are uncorrelated with each other. For example, by only investing into Australian stocks, an investor’s portfolio may be at high risk of losing capital if there is a significant event that happens domestically, causing the stock market to crash. On the other hand, if the portfolio was diversified across various stock markets, only the domestic stocks would be affected, rather than the entire portfolio.
Furthermore, as Figure 1 demonstrates, Australia’s share market performance in the year 2017, measured by ETF performance shows Australia is lacking when compared with the rest of the world. This may be because the Australian share market is heavily influenced by performance the mining and financial sectors – both of which have not performed great as of this year. On the other hand, for example, The United States has seen strong growth in its technology sector, and China has continued to grow its manufacturing sector at a sound pace. The Australian market, on the other hand does not present as many opportunities into these sectors, and finding opportunities to diversify only in Australia may be difficult given the economic landscape.
By investing only in Australia, you are missing out on potentially higher gains that other markets present, as well as limiting beneficial effects of diversification. A common theme behind why Australian’s don’t invest internationally is due to the lack of access, and high costs associated with it. Currently, purchasing or selling shares in the US market will on average cost you between $19.95 – $59.95 USD. At Monex, we strive to provide a platform which gives you access easy to multiple markets, all at a very fair and competitive price. Monex is unique as it provides access to over 50,000 listed securities across 12 global stock markets, all controlled by a multi wallet currency with brokerage ranging between 0.10-0.30% (starting at 9.99USD). To find out more information regarding available markets and brokerage costs, please visit Fees and Charges page.