GW - Hi, I'm Gemma Weeks from ETF Securities, and today I'm going to tell you about four strategies that you can use to build an international portfolio using ETFs.
Adding international shares to your portfolio offers you the benefit of global and sector diversification, currency diversification and risk reduction, and all of this can be achieved using ETFs currently listed on the ASX.
Technological advances and making the world a smaller place in many ways and the world of financing investing is no different, with global capital flows and market access growing at a rapid rate. But some investors, however, like to keep their investments closer to home and studies are showing that the home country bias in Australia is stronger than almost anywhere else in the world. By investing in a portfolio dominated by the domestic share market, which represents us in three percent of global market capitalization, many Australians are not only missing out on significant opportunities available offshore, but are overexposing themselves to systematic risks in the Australian economy.
But investors can now solve this home country bias by building a diversified portfolio of international shares using ETFs. And there are four main ways that ETFs can be used to achieve this.
And the first approach is by far the simplest, where you can use a single global ETF, which passively tracks a broad index made up of hundreds of stocks from around the world.
The next most simple approach, is to use regional or country specific ETFs to construct a global portfolio with more flexibility and the benefit of this approach is that you can control allocations to each region more precisely, and tactically direct your assets to the countries where you expect returns to be higher. As part of this approach, you should consider whether you want to incorporate emerging markets, given these markets tend to be much more volatile than developed regions.
The next step for you to consider is whether you want to use sector ETFs, which can be particularly important for domestic portfolio diversification because not only can sector ETFs provide international exposure, but the average Australian share portfolio is often heavily exposed to banks and materials, whilst having almost no exposure to technology. So, international ETFs allow you to diversify into other sectors.
Now, the fourth step to consider, is whether you want to use strategy in thematic ETFs to target returns. These ETFs seem to outperform the market by investing in stocks with certain characteristics or exposures to certain themes such as investing in high dividend payers, or stocks involved in quickly developing industries like robotics and clean energy.
Such ETFs are often referred to as smart Beta, and can be used to tilt your portfolio to suit certain risk and return preferences. Finally, when considering all these international allocations, you should consider your exposure to currency fluctuations, because some ETFs have embedded exchange rate risk. So you should be aware of the types of fund that you're investing in, and actively decide whether you want to keep the currency exposure of the ETF, or choose a hedged ETF.
As with any other investment, you should be aware of transaction costs, because ETFs offering more specialised exposures tend to charge higher management fees than vanilla index funds, so this should be factored into your asset allocation decisions. Furthermore, bid-ask spread should also be closely watched because due to Australia's time zone, most global markets are closed during our trading day, which makes pricing less transparent than in other markets and in some cases, spreads can be narrower later in the day when markets across Asia are fully open. Thanks for watching and good luck with investing.