International Shares Sector
The Best ETFs global or international shares sector includes ETFs, managed funds and index funds that cover international equities/share markets. The most popular international shares markets for ETFs include:
- The USA
- Europe & the UK
- Emerging Markets (EM)
- Asia (including China)
With around 98% of shares listed on markets outside of Australia, we think it's vital for Australian investors to consider looking abroad for exposure to some of the world's best companies, including those from the technology, communications and health care sectors.
Performance Characteristics
Over the ultra-long-term, international shares have proven to be among the best-performing asset classes. However, it is also one of the riskier investments you can make, as measured by standard deviation or volatility.
Hedged or Unhedged?
When you're investing in international ETFs, it's worth noting whether or not you're prepared to take on the risk that the currency moves in your favour or against you. Typically, you'll have two options:
- Hedged ETFs will attempt to 'lock-in' the exchange rate at the time you make your investment
- Unhedged ETFs do not provide protection against movements in the currency
Which one is better? That's up to you.
Just keep an eye on the costs of the hedged versus unhedged versions of the strategy/ETF and consider your own risk profile.
Note: you should always consult a licensed and trusted financial adviser before doing anything. This information is factual information and should not be considered financial advice.
Taxes
Finally, take note of where your international ETF is 'domiciled' by reading its PDS or the ETF Issuer's website because this -- sometimes hidden -- feature could meaningfully affect your tax.
- Australian domiciled ETFs - these are registered and regulated in Australia and are 'Australian residents' for tax purposes. These are just like an ordinary share or ETF you would buy on the ASX and the tax paperwork is filled out by the fund manager at the fund level.
- Foreign domiciled, 'cross-listed' or CDI ETFs - these ETFs are registered offshore and provide a beneficial interest to investors via a 'CDI' listing on the ASX. Sometimes these ETFs may require additional paperwork for taxes, such as filling in a US W8-BEN form to reduce withholding tax or expose ETF investors to foreign regulation or U.S. Estate Taxes.
Consult with your tax and/or financial adviser before investing.
International Shares Sector Risks
According to academic study, when you invest globally, you may be lowering some of your risks. For example, you won’t have all of your eggs in your ‘Australia basket’.
However, there are extra risks added when you invest overseas. Some of these risks include:
- Sovereign/regulatory risks – Governments and regulators throughout the world can change their policies on investing, taxes and even the rights of people and investors. Australia has a very stable and robust financial, legal, political and societal system — many countries don’t.
- FX/currency risks – A big reason many investors put their money overseas is to get exposure to another country’s currency. For example, if you invest 1 AUD into US Dollars at a currency exchange rate of 1.00, you will get 1 USD in return. If the USD gets stronger (meaning the Aussie dollar exchange rate falls), your 1 USD is now worth more! However, it can go the opposite direction. For example, if the AUD-USD goes to 1.10, your 1 USD (bought at a lower exchange rate) is now worth less in AUD terms than before. This risk is the reason why some ETFs are currency ‘hedged’ — to avoid the impact of currency fluctuations.
- Counterparty risk & holding structure – Some ETF issuers use complicated holding structures to get you exposure to the underlying investment overseas. In Australia, ASX-listed shares and ETFs use the same system to ‘settle’ transactions and ‘hold’ your ETFs in your name, it’s called the CHESS system. However, if the ETF invests in overseas shares it’s likely those shares will be held using another system or holding structure governed by other rules. Rest assured there are some safeguards in place. But you should always do your research, read the ETF’s Product Disclosure Statement (PDS) or consult a licensed financial adviser.
- Timezone – Often, global sharemarkets will be open when you’re asleep. Conversely, Australian sharemarkets (where you buy into the ETFs) operate when the rest of the world is asleep. That makes tracking the latest ETF prices a little more difficult for you and for ETF issuers. This could lead to changes in the ‘unit price’ or the “net asset value” (NTA) of the ETF overnight.
You should always consult a licensed and trusted financial adviser before doing anything. This information is general information and should not be considered personal financial advice.
Looking for something better?
This brilliant (and free!) report is issued by Best ETFs Australia, a division of The Rask Group Pty Ltd. It is not a recommendation.
Speak to a financial professional before relying on this information and please read our Financial Services Guide (FSG).
