International Diversification: Best ETFs for Global Exposure
Australian investors have historically had a strong home bias, with many portfolios heavily weighted toward Australian equities. However, international diversification is crucial for building a robust investment portfolio. This article explores the best Australian-listed ETFs for gaining international exposure.
Why International Diversification Matters
The Australian share market represents less than 2% of global market capitalization. By limiting investments to Australia, investors miss out on:
- Geographic diversification: Reducing country-specific risks
- Sector diversification: Access to industries underrepresented in Australia
- Currency diversification: Exposure to multiple currencies
- Growth opportunities: Access to faster-growing economies and markets
Top International ETF Options
US Market Exposure
iShares S&P 500 ETF (IVV)
- Management Fee: 0.04% p.a.
- Exposure: 500 largest US companies
- Why it's popular: Low cost, broad US market exposure, strong long-term performance
Vanguard US Total Market Shares Index ETF (VTS)
- Management Fee: 0.03% p.a.
- Exposure: Entire US stock market (3,000+ companies)
- Why it's popular: Even broader exposure than S&P 500, slightly lower fee
BetaShares NASDAQ 100 ETF (NDQ)
- Management Fee: 0.48% p.a.
- Exposure: 100 largest non-financial NASDAQ companies
- Why it's popular: Heavy technology exposure, strong growth potential
Global Ex-Australia Exposure
Vanguard MSCI Index International Shares ETF (VGS)
- Management Fee: 0.18% p.a.
- Exposure: Developed markets excluding Australia
- Why it's popular: Diversified international exposure, reasonable fees
VanEck MSCI World ex-Australia Quality ETF (QUAL)
- Management Fee: 0.40% p.a.
- Exposure: High-quality companies from developed markets
- Why it's popular: Quality factor focus, potentially lower volatility
Emerging Markets
Vanguard All-World ex-US Shares Index ETF (VEU)
- Management Fee: 0.08% p.a.
- Exposure: Global markets excluding US
- Why it's popular: Very low cost, broad international exposure
Building an International Portfolio
Conservative Approach
- 60% Australian equities (VAS/IOZ/A200)
- 30% US equities (IVV or VTS)
- 10% Global ex-Australia (VGS)
Balanced Approach
- 40% Australian equities
- 40% US equities
- 15% Global developed markets
- 5% Emerging markets
Growth-Oriented Approach
- 30% Australian equities
- 50% US equities (including NDQ for tech exposure)
- 15% Global developed markets
- 5% Emerging markets
Currency Considerations
Most international ETFs are unhedged, meaning investors are exposed to currency fluctuations. This can:
- Add volatility: Currency movements can amplify or dampen returns
- Provide diversification: Currency exposure can be beneficial over the long term
- Require consideration: Investors should understand their currency risk
Some ETFs offer hedged versions, which remove currency exposure but typically come with slightly higher fees.
Tax Implications
Australian investors should be aware of:
- Dividend withholding tax: US and other countries may withhold tax on dividends
- Foreign tax credits: May be available to offset Australian tax
- Capital gains: Treated similarly to Australian shares for tax purposes
Conclusion
International diversification is essential for Australian investors seeking to build robust, well-diversified portfolios. The ETFs mentioned above provide cost-effective access to global markets, allowing investors to reduce home bias and capture growth opportunities worldwide.
When selecting international ETFs, consider:
- Cost: Lower fees compound over time
- Coverage: Ensure adequate geographic and sector diversification
- Currency: Understand whether hedged or unhedged exposure suits your needs
- Tax: Consider tax implications of international investments
By incorporating international ETFs into your portfolio, you can reduce risk, increase diversification, and access the world's best investment opportunities.