ASX shares are the most widely-held asset class among local investors, with 58% of investors directly holding shares listed on an Australian exchange. This should come as no surprise. After all, investors are comforted by ease of access to the ASX, familiarity with the businesses they choose to invest in, plus the ability to stay informed about company-specific and industry-wide news.
However, the ASX represents less than 2% of all investment opportunities by global market capitalisation, so investors may want to consider the benefits of investing in international shares. As it stands, according to the latest ASX Australian investor study, only 14% of local investors directly hold shares listed on an international exchange.
With the recent launch of US stock trading through the SelfWealth online share trading platform, now is an opportune time for us to discuss the merits of investing in US shares. You can also learn how to add US trading to your SelfWealth trading account.
1. Control over portfolio weighting and risk sizing
While investors already have access to international stocks via ETFs, which serve a useful purpose for those wanting broad exposure to a sector or market, directly investing in US shares is a different proposition.
Directly investing in US shares provides you with more control as to which companies you would like exposure to. If you already have ASX shares as part of your portfolio, then being able to precisely dictate which sectors and companies you gain exposure to through US shares is valuable for risk sizing.
For example, if you would like to have exposure to certain biotech stocks listed on the Nasdaq, one might look at an ETF tracking that index like the Betashares Nasdaq 100 ETF (ASX: NDQ).
However, if you already have significant exposure to ASX tech stocks like Afterpay (ASX: APT) and Xero (ASX: XRO), investing in such an ETF could increase your exposure to the tech sector more than desired due to the high composition of companies like Alphabet (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT).
To avoid overexposure, you may want to consider investing directly in the biotech stocks that capture your interest, provided the remainder of your portfolio is otherwise generally diversified.
In addition, you can also invest directly in more niche stocks that might not be part of the main indexes or ETFs that mimic them, however, with this comes greater risk amid lower diversification and the likelihood of increased volatility.
2. Direct exposure to the world’s largest economy
Despite the economic disruption caused by COVID-19, the US economy remains the largest economy in the world. As such, investing in US shares provides direct exposure to this theme.
If we take a look at some of the fiscal measures adopted specifically in the US, be it various financial packages rolled out by the government, or the Federal Reserve’s unprecedented efforts to prop up the economy, these initiatives have had a profound impact on the US share market.
This economic support is widely attributed as the main catalyst that allowed the US stock market to record a significant rally following its crash in March 2020. In fact, with the support of this fiscal aid, which many analysts expect may continue for several years, US shares went on to significantly outperform various peers.
It also goes without saying that global markets tend to follow the US stock market. So with this in mind, having exposure to the world’s largest economy provides a distinctly different tailwind to that of local ASX shares.
3. A complementary investment strategy
When looking at the nature of returns for ASX and US-listed stocks, there are some stark differences that lead themselves to represent different investment strategies.
The ASX has long established a reputation as a market for income-oriented investors, with yields among the highest of any major stock market in the world. Since the beginning of the 1980s, the All Ordinaries index has traded with an average dividend yield of around 4.1%. In comparison, the S&P 500 has largely traded with an average yield of circa 2%.
Moreover, the average payout ratio for ASX-listed companies was in the vicinity of 70% during ‘normal’ times prior to COVID, while the S&P 500 payout ratio was estimated at around 40%.
Naturally, there are exceptions to the above points. For example, stocks like British American Tobacco (NYSE: BTI) and Exxon Mobil (NYSE: XOM) trade with an implied yield currently greater than 7%.
Generally speaking, however, US businesses are more inclined to pay out less of their earnings as dividends and instead engage in share buybacks or reinvest back into the business.
It is this trend that has contributed, in part, towards the outperformance of the US stock market relative the ASX over at least the last decade. This comes despite a large number of companies trading on high price-to-earnings ratios such as Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA).
With this in mind, an investor might have the option to complement their hunt for yield and franking credits on the ASX by investing in US shares that prioritise capital growth instead. Of course, that’s not to say the ASX does not have companies that are growth oriented, but as we’ll touch on in our next point, diversity is beneficial.
4. Access to far more investment opportunities
As much as one may feel overwhelmed by the number of stocks across the ASX to choose from, the local share market represents less than 2% of all opportunities across global equity markets. Valued at around $2.2 trillion, the ASX is not just a fraction of the size of the NYSE and Nasdaq, but it’s also smaller than the world’s largest company, Apple (AAPL), while not all that much bigger than the S&P 500’s next-largest companies.
The entire ASX is smaller than Apple, and comparable with other US mega-tech stocks
Through the SelfWealth online share trading platform alone, there are more than 7,500 financial instruments available to trade. As such, investing in US shares immediately opens up a new horizon as far as the breadth and diversity of stocks, spanning thousands upon thousands of investment opportunities.
Not only can you invest directly in some of the most well-known companies with global operations spanning across various geographic markets, but you can also access foreign businesses that are listed on the world’s largest market.
On top of that, the US stock market is underpinned by a very different industry profile.
In total, roughly 60% of the entire market cap of the ASX is represented by the banks, real estate trusts and resources companies. The emergence of home-grown tech success stories has helped the information technology sector grow, but only marginally, accounting for just 4.5% of the ASX 200.
ASX 200 sector composition, led by banks and iron ore miners
In comparison, tech companies are the predominant driver of the US stock market, with information technology shares representing as much as 27.6% of the S&P 500. However, this has also become one of the main reasons that investors consider investing in US shares, so they have access to companies like Facebook (NASDAQ: FB) that are truly on a global scale.
S&P 500 sector composition, led by tech giants
What’s more, the US stock market also allows Australians investing in US shares the opportunity to access niche industries or a broader selection of stocks from niche industries than they otherwise would have access to. For example, the aerospace and defence sector, pharmaceuticals, the automotive industry and so on.
5. Enhanced portfolio diversification
We’ve all heard the saying that you shouldn’t put all your eggs in one basket. As a risk mitigation measure, this is why many investors choose to build a diverse portfolio of stocks. In effect, you mitigate your exposure to any one stock, which is considered a key method with which to reduce portfolio volatility.
However, diversification isn’t just limited to a specific stock or sector, it also extends to asset class and geography. Investing in US shares provides exposure to international shares, an asset that while similar to local stocks, has distinct features as we’ve alluded to throughout this piece.
Of course, geographic diversity means taking on exposure to a different set of regulations, socioeconomic factors among many other risks and considerations, in addition to foreign exchange fees and fluctuations.
On this point, when investing in US shares, forex movements in the AUD/USD rate have potential to act as either a tailwind or headwind, particularly depending on your investment horizon.
And while the US market might often set the tone for the ASX to follow, long-term data, shown below, suggests that investing in US shares as part of a broader portfolio of international stocks can potentially reduce portfolio volatility, with the US market recording the lowest annualised volatility of any individual major market in the world.
Source: Vanguard, data from 1970-2018
Taking stock of US share trading
Investors should weigh up all the considerations associated with US share trading before deciding whether investing in US shares is appropriate for them.
Some of these considerations are specific, as far as your financial and tax position, investment strategy and knowledge and existing holdings, while others extend more broadly to the different time zone and the costs involved.
However, one key takeaway for investors is that investing in US shares in addition to an existing portfolio of ASX stocks represents a diversified investment strategy. This comes with numerous potential benefits for those who seek to capitalise on the inherent differences in the composition and scale of opportunities at hand.
SelfWealth Ltd ACN 52 154 324 428 (“SelfWealth”) (Australian Financial Services Licence Number 421789). The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Taxation, legal and other matters referred to on this website are of a general nature only and should not be relied upon in place of appropriate professional advice.