Key takeaways

• Complementing Australian equities with US stocks can provide diversification benefits, may help manage portfolio risk, and has the potential to support long-term returns.

• Australian investors may benefit from foreign exchange (FX) gains on USD-denominated assets if the US dollar appreciates against the Australian dollar.

• If the USD weakens against the AUD, this can offset or even outweigh gains on US shares. Currency risks may be managed through cash holdings, currency ETFs, or hedged funds.

• Any allocation to US equities should reflect your individual investment goals, risk tolerance, and overall portfolio strategy.

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Many Australian investors favour local shares, but including US equities can offer several advantages. Broader investment choices, potential for reduced risk, and diversification across geographies, economies, and investment strategies can strengthen a portfolio’s resilience and help position it for long-term outcomes.

Investors may also benefit from FX movements. A stronger USD can enhance returns once assets are converted back to AUD. However, the reverse is also true – a weakening USD can erode gains. These risks can be managed in different ways, but any allocation to US equities should reflect each investor’s circumstances and tolerance for risk.

Let’s explore the key considerations when investing across both markets.

Why balance exposure between US and Australian markets?

The primary advantage is diversification. By spreading investments across both markets, investors avoid concentrating risk in a single exchange or industry. This can help manage portfolio volatility and may support performance over the long term.

Since the Global Financial Crisis, the S&P 500 has generally outperformed the ASX 200 on a total return basis; as a result, investors with US exposure may have experienced stronger outcomes than those invested exclusively in the Australian market.

The breadth of the US market offers investors access to a much wider range of opportunities. It includes thousands of listed companies of different sizes – from large global firms to mid-sized businesses and smaller companies – along with sectors and industries that are not represented on the ASX.

Balancing investment across Australian and US equities also diversifies exposure across different economic cycles and monetary policies. As the world’s largest economy, the US attracts international business and funding, while US policy decisions can have a significant influence on global markets.

Finally, many investors look to the US market for growth-oriented strategies. US companies often reinvest profits to drive expansion, whereas Australian companies may place greater emphasis on distributing dividends and franking credits.

How to balance exposure to both US and Australian markets?

There are two main ways to access US equities: direct investment and ETFs.

Direct investment involves buying individual US stocks, giving investors control and choice, but also concentrating risk if only a few holdings are chosen.

ETFs pool multiple companies in a single trade, spreading exposure across a basket of stocks and reducing the impact of any one company underperforming. Options range from broad market funds such as the S&P 500 to sector-specific ETFs. Investors may also consider whether the fund is hedged or unhedged.

When deciding how much to allocate between US and Australian shares, factors such as investment goals, time horizon, risk tolerance, tax obligations, and expectations for currency movements all come into play. Younger investors with a higher risk tolerance are more likely to hold a greater share of growth assets, while more conservative investors may prefer investments that emphasise income, such as Australian shares with dividends and franking credits.

How can investors take advantage of potential FX gains from the US dollar?

By investing in US markets, whether through direct holdings or exchange-traded funds, Australian investors gain exposure to FX movements.

If the US dollar appreciates against the Australian dollar, USD-denominated assets may increase in value once converted back. These currency movements can provide an additional boost to portfolio returns.

As such, investors who anticipate a stronger US dollar – for example, due to rising interest rates, strong US economic growth, or demand for US assets – may benefit from holding assets in USD-denominated form. In some cases, this may also act as a partial hedge against a weaker Australian dollar.

While investing directly in US-listed stocks provides this potential benefit, investors can also gain FX exposure through unhedged ETFs. Because these funds do not offset currency movements, returns in AUD reflect both the performance of the underlying US assets and changes in the USD/AUD exchange rate.

What are the risks if the FX growth trend reverses?

While a stronger US dollar may boost returns on USD-denominated equities, if the currency weakens against the AUD this can act as a headwind.

Factors that may contribute to a weaker US dollar include easing monetary policy, softer economic data, subsiding geopolitical or macroeconomic risks, or stronger global risk appetite. In these circumstances, investors may shift away from the relative safety of the USD into other currencies or markets.

This reinforces the case for balance. While US assets can be affected by currency movements that lower AUD returns, Australian equities are not exposed to these effects in the same way.

If US investments are unhedged, they remain fully exposed to FX swings, which can sometimes offset or even outweigh gains in share prices. Once converted back into AUD, a weaker US dollar reduces the value of USD-denominated holdings compared with what they would have been if the exchange rate had remained steady.

Can investors manage FX risks in a portfolio?

Foreign exchange differences can act as either a tailwind or a headwind, but investors have options to help manage the risks.

This may include holding surplus cash in the preferred currency, using currency ETFs that track the performance of the USD relative to the AUD, or selecting hedged ETFs that aim to limit the effect of adverse FX movements.

Some investors also combine hedged and unhedged exposures, or rebalance their allocations periodically, to maintain a currency mix that suits their risk tolerance and outlook.

Investing in US shares to complement your portfolio

Balancing investment between US and Australian markets may provide diversification, broaden investment opportunities, and spread exposure across different sectors and economies.

A stronger US dollar may boost AUD returns, while a weaker dollar may detract from them. FX risks can be managed through strategies such as cash holdings, currency ETFs, and hedged US-focused ETFs.

By considering both markets and reviewing allocations regularly, investors may be able to build portfolios that are more diversified, resilient, and better positioned for long-term outcomes.