How to add international exposure to your portfolio

So, what does investing offshore involve? 

Simply put, it involves buying shares or other financial instruments in companies outside Australia. 

There are more than a dozen stock exchanges worldwide, many of which dwarf the size of the ASX. Buying shares on any of these exchanges would add international exposure to your portfolio. More Australian investors are choosing to do this and are investing in companies in the United States, Asia, and Europe.

Why should you add international exposure?

The Australian share market accounts for just 2% of the world’s equities. Suppose you limit your investment horizons to Australia. In that case, your portfolio will be highly concentrated from a geographic perspective, and you will miss out on owning some of the world’s most significant and transformative companies. 

Investing in international companies has never been easier. Australian investors can gain offshore exposure by purchasing shares directly on foreign exchanges, purchasing exchange-traded funds (ETFs) on the ASX stock exchange, or investing in managed funds. 

Investing internationally allows you to diversify your portfolio across different countries and emerging and advanced economies. By doing so, you lower your portfolio’s overall risk and volatility. 

If there is an economic slowdown or black swan event in one country, its impact on your overall portfolio will be limited, and you can still benefit from rising markets elsewhere. 

Investing internationally can also provide exposure to industries that do not have as strong a presence in Australia. 

For example, there are fewer listed technology companies in Australia than in the United States, and the Australian companies tend to be smaller. If you want to include technology giants such as Apple Inc (NASDAQ: APPL), Google parent company, Alphabet Inc (NASDAQ: GOOG, NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), or Meta Platforms Inc (NASDAQ: META) in your portfolio, you will need to look offshore.

What are the risks of international exposure?

Investing internationally does not come without risk. The returns you earn on international investments can be impacted by many factors, including currency fluctuations, local recessions, and domestic regulatory changes. 

When you purchase individual international shares directly via a foreign stock exchange, you must buy them in the relevant foreign currency. Any dividends will be paid in foreign currency, as will the proceeds from selling the shares. 

This means movement in the exchange rate between the Australian dollar and the foreign currency will impact your returns. 

For example, if the foreign currency becomes more robust, it can buy more Australian dollars, so your returns in the local currency will be higher. If the Australian dollar is stronger instead, the opposite occurs. 

Impacts from local economic conditions

Investors also need to be aware of local economic conditions in international markets. If there is a recession in the economy where your foreign investments are located, the performance of your shares might be weaker, even if the Australian economy is performing well. 

Local conditions mean international investments can perform quite differently from domestic investments. Of course, this is partly the appeal of global investing. You get diversification through geography and differing economic conditions. 

Comparing the performance of different share markets around the globe shows that in the 10 years to June 2021: 

• the S&P/ASX 200 Index (ASX: XJO) gained about 59% 
• the S&P 500 Index (SP: .INX) rose about 231% 
• the NASDAQ-100 (NASDAQ: NDX) gained about 421%
• Japan’s Nikkei Index (NIKKEI: NI225) gained nearly 200%. 

However, the Japanese stock market did not make significant gains for a decade from the early 2000s. It wasn’t until 1 December 2020 that the Nikkei 225 finally surpassed its previous high set back on 5 April 1991.

Imagine how you would feel if you were an investor who owned shares only in Japan during the 1990s crash and during the 30 years of stagnation that followed. 

You would be looking back and wishing you’d been internationally diversified to moderate the impact of such a country-specific event on your portfolio and, by extension, your long-term retirement goals.  

What’s the difference between buying domestic and international shares?

Investing internationally means buying shares that are located in a different jurisdiction. This means taxes and transaction costs can differ from purchasing domestic shares. 

For example, US withholding tax is generally levied on dividend distributions paid to Australian shareholders of US stocks. This is typically 30% but is usually reduced to 15% under a tax agreement between the two countries. 

If withholding tax is levied, the shareholder is generally entitled to a foreign income tax offset. Different tax regimes apply across various international jurisdictions, so it is vital to obtain professional tax advice if you are considering investing internationally. 

To purchase international shares, you will need to open an account with a brokerage that facilitates international trading. The fees associated with international share trades can differ from domestic share trades. 

Brokerages might charge a higher fee for international trades and levy charges indirectly via currency conversion services. For buy-and-hold investors, the impact might be minimal. For regular traders, however, these costs have the potential to add up and diminish returns. 

How to invest directly in international shares

Several brokerages allow Australian investors to buy international shares. 

The big four banks each offer platforms that facilitate international share trading, and other providers include Stake, Self Wealth, and CMC Markets. 

When deciding on a broker, consider your investment strategy and how you will execute it. 

Different brokerages have different fee structures, so it’s worth looking into the likely costs of implementing your investment strategy across a number of potential platforms. 

You should also consider any additional features or tools offered by different brokerages that could assist your investment journey. 

In Australia, we have CHESS Depository Interests (CDIs), which give holders beneficial ownership of the foreign company that issued the CDIs. A CDI offers investors the same beneficial interests in the overseas company it represents but allows them to be traded on the ASX rather than requiring international brokerage. 

For example, ResMed Inc (NYSE: RMD) is traded on the New York Stock Exchange. However, here in Australia, we can own the company on the ASX by purchasing shares of their CDI equivalent, Resmed CDI (ASX: RMD).

Investing in international ETFs

Many investors choose to gain international exposure via ETFs. A broad range of ETFs traded on the ASX provide low-cost exposure to different global markets and industries. 

These might be specific to a stock exchange – such as the Betashares Nasdaq 100 ETF (ASX: NDQ) – or a country or region and give exposure to emerging or developed markets. 

Emerging markets are the economies of developing nations that are becoming increasingly engaged with global markets as they grow. Developed markets have advanced economies with relatively stable growth, established financial systems, and liquid capital markets.

Emerging markets constitute a relatively small proportion of global equity markets but account for a significant share of global GDP and growth. Investors might wish to invest in emerging markets for potential long-term growth as these economies develop and mature. 

Developed economies provide their own investment benefits, including economic and political stability, better-developed capital markets, and more advanced infrastructure. 

Investors can gain exposure to emerging and developed markets via ASX ETFs and specific sectors and regions of the global economy. 

ASX ETFs can have a global scope, covering equities across multiple countries, or a narrower focus, holding shares from a specific country or stock exchange. 

There are numerous ASX ETFs focused on the US market, including a number focused on the S&P 500 and the NASDAQ. ETFs are available for various countries, including India, Japan, China, and regions such as Asia, Asia ex-Japan, and Europe. 

An example is the Betashares Asia Technology Tigers ETF (ASX: ASIA), which aims to track the performance of an index comprising the 50 largest technology and online retail stocks in Asia ex-Japan. These stocks include Alibaba Group Holding Ltd (NYSE: BABA) and Tencent Holdings Ltd (HKG: 0700).

ETFs are also available that allow investors to pursue specific investment sectors or themes, such as healthcare, infrastructure, cloud computing, cybersecurity, and clean energy.

Foolish takeaway

Adding international equities to your portfolio allows for additional growth opportunities and diversification benefits beyond those available in Australia alone. 

Increasing numbers of Australian investors choose to allocate a proportion of their portfolios to international holdings to leverage the benefits of international diversification and gain exposure to offshore investment opportunities. Subsequently, investors have the chance to own some of the biggest companies we engage with here in Australia daily.