International shares

Investing in overseas shares

International shares give you access to larger markets outside Australia and diversify your investment portfolio. However, there are risks you should be aware of before you add international shares to your portfolio.

Here we explain how to invest in international shares and how to decide if they are right for you.

Comparing the Australian share market to the world's markets

The Australian share market has total market capitalisation of $1.9 trillion (as at January 2018), which represents around 1.7% of the world's total share market value.

Australia's major stock exchange, the Australian Securities Exchange (ASX), is the sixteenth largest in the world by market capitalisation, but is relatively small when compared with other international exchanges.

Figure 1 shows the top 20 international exchanges by market capitalisation at closing on 31 January 2018.

  

Figure 1: Ranking of international exchanges as at 31 January 2018 

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Source: World Federation of Exchanges, January 2018.

The Australian share market is heavily weighted toward the financial and mining sectors, which account for about 60% of the ASX200 index. The ASX200 index tracks the performance of the top 200 companies, by market capitalisation, listed on the ASX.

Investing in international shares can expose Australian investors to large companies in sectors that may not be well represented in the Australian market. International markets may also perform differently from the Australian market over the same period, which means there may be times when overseas markets will give you higher returns than the Australian market (and vice versa).

Figure 2 shows the comparative performance of the major Australian, US and global indices for the 10 years to 21 February, 2018. The S&P500 index returned 103% over the period, the MSCI World index grew by 45% and the ASX200 by 6%.

 

Figure 2: Comparative performance for major Australian, US and All-World share market indices (29 February 2008 - 21 February 2018)

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Source: Bloomberg.

Benefits and risks of international shares 

Benefits of international shares

Here are some of the benefits of investing in international shares:

  • More options - Investors are able to invest in companies, industries and asset classes that are not represented, or are underrepresented, in the Australian share market.
  • Diversification - International shares can provide investors with geographic as well as asset class diversification. This means a slowdown in one market will have less of an impact on your portfolio.

Risks of international shares

Investing in international shares carries many of the same risks as investing in Australian shares but there are also some risks that are unique to global investments. These include:

  • Currency risk - Foreign shares are held in the currency of the country of origin. Income and capital gains or losses must be converted into Australian dollars (AUD), which means you are exposed to additional volatility from movements in exchange rates. If the value of the AUD rises against a particular currency, the value of investments held in that currency will fall. Also, a fall in the AUD will increase the value of your investments.
  • Political and regulatory risk - International shares are subject to country-specific risks, such as political and regulatory changes. While it might be easy to keep up with these changes in Australia, it may be harder to keep track of what's happening in other markets. You will need to understand the market and laws relating to foreign investment in the country you are investing in. You will also want to find reliable information sources to help you keep track of your investments.
  • Time differences - Other markets operate in different time zones, so trades and information may be delayed.
  • Tax - For taxation purposes, investment income from international investments is treated differently from income from domestic investments. If you hold international shares and receive income, professional tax advice is recommended.

If you are concerned about any of these risks you should seek professional financial advice before investing in international shares.

How to invest in international shares 

Typically Australians invest in international shares in one of three ways: using a broker, through a managed fund or through an exchange traded fund (ETF).

Brokers

Most brokerage firms or online broking services can buy and sell shares listed on major international exchanges such as the New York Stock Exchange, NASDAQ, London Stock Exchange and Euronext. For smaller markets or exchanges, check whether your broker can trade on these.

Smart tip

Look for a broker who provides the services you're looking for at an affordable price. Services and fees can vary a lot depending on who you choose.

Direct investing in individual international shares is significantly more expensive than investing in Australian shares. Make sure you look at all the fees including brokerage fees, currency conversion fees, foreign security custody fees and internal transfer fees.

Exchange traded funds (ETFs)

These are investment funds, similar to managed funds, that can be bought and sold on a stock exchange. Most ETFs are passive funds that track the returns of a specific index or market sector. They can be bought and sold like ordinary shares through your stock broker or online trading account.

There are a range of ETFs available that track various indices such as the ASX200 and the S&P500. Some may track sector-specific indices such as the global healthcare index or the Australian resources index.

ETFs can be a cost-effective way to gain exposure to international shares, but it's important that you read the product disclosure statement (PDS) to know what you're investing in and the risks involved. 

Find out more about exchange traded funds and their risks.

Managed funds

Managed funds pool your money with money from other investors and an investment manager manages it on your behalf.

Some funds focus on international shares, perhaps specific regions or industry sectors, while others simply include international shares as part of a diverse mix of assets.

Fund managers may have strategies in place to limit the impact of exchange rate movements on your investment. As with any managed fund, read the PDS before you invest, and only choose investments that are compatible with your investment goals and risk tolerance.

Diversification

Diversification is an essential part of managing investment risk. Ideally you want to diversify both within and across asset classes.

Geographic diversification can lower overall investment risk. Economies grow at different rates and at different times, so a portfolio that is diversified geographically benefits from changes in faster growing economies and offers some protection from slowing economies.

Find out more about diversification.

International shares can be an effective way to diversify your portfolio. However, the risks can be different from when you invest in Australian shares. Weigh up the pros and cons and seek professional financial advice if you are unsure whether international shares are right for you. 


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Last updated: 15 Oct 2018