Adding international exposure

The global opportunity

There are roughly 80 stock exchanges worldwide, many of which dwarf the size of the Australian Securities Exchange (ASX). Buying shares on these exchanges adds international exposure to your portfolio. 

Why would you want to?

Investing offshore can offer significant benefits to Australian investors, including more investment options, enhanced diversification, lowered portfolio risk, and exposure to some of the world's best companies.

More Australians are choosing to invest in companies in the United States, Asia, Europe and beyond. So, let's explore how to invest offshore and whether adding international exposure might be a good option for your ASX share portfolio.

How to invest directly in international shares

An increasing number of local brokerages enable Australian investors to buy global shares. 

The big four banks – Commonwealth, Westpac, National Australia Bank and ANZ – each offer platforms that facilitate international share trading. 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 several 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) trades 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 exchange-traded funds (ETFs). They are a popular and straightforward way to invest in many assets simultaneously through a single trade. A broad range of ETFs traded on the ASX provide low-cost exposure to 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. Investors might wish to invest in emerging markets for potential long-term growth as these economies develop and mature. 

Developed markets have advanced economies with relatively stable growth, established financial systems, more advanced infrastructure, and liquid capital markets.

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. Numerous ASX ETFs focus on the US market, including a number that specifically tracks 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 and Tencent Holdings Ltd.

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

What's the difference between buying domestic and foreign shares?

An international stock market investment involves buying shares in a jurisdiction different from your home country. 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. 

As mentioned, you must open an account with a brokerage facilitating international trading to purchase foreign shares directly. 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 or day traders, however, these costs have the potential to add up and diminish returns. 

Why add international exposure?

Investing offshore has many benefits, including:

Broad access to other markets: The Australian share market accounts for just 2% of the world's equities. Limiting your investment horizons to Australia will make your portfolio highly concentrated geographically. You will miss out on owning some of the world's most significant and transformative companies. 

Range of investment methods: 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. 

Diversification: Investing in overseas markets 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. 

Risk mitigation: The impact on your portfolio from an economic slowdown, recession or black swan event in one country will be limited to that region. You can still benefit from rising markets elsewhere. 

Expanded industry exposure: Investing overseas provides exposure to industries with less presence in Australia, along with many of the world's best players. Take technology, for example. The United States is home to some of the world's greatest tech giants. You must know how to buy US stocks in Australia to include top US companies in your portfolio. Think Apple Inc, Google parent company, Alphabet Inc, Amazon Inc, or Meta Platforms Inc (formerly Facebook).

What are the risks of international exposure?

Investing overseas does not come without risk. Many factors, including currency fluctuations, local recessions, and domestic regulatory changes, can impact your returns on international investments. 

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 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. 

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 September 2023: 

• S&P/ASX 200 Index (ASX: XJO) gained about 33% 
• S&P 500 Index (SP: .INX) rose about 163% 
• NASDAQ-100 Index (NASDAQ: NDX) gained about 373%
• Japan's Nikkei Index (NIKKEI: NI225) gained around 125%. 

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.  

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 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 can own some of the biggest companies we engage with here in Australia daily.

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