Here are 3 considerations when investing internationally!
1. Shares, ETFs, Funds – Which one should you choose?
Investing in global equities can help you sensibly diversify and add international exposure to your portfolio. But how do you decide whether to invest in global shares, global ETFs or global (active and passive) funds?
Below we explain the pros, cons and suitability of each security.
Global individual shares
There is an increasing number of brokers that offer international shares. This has made it more accessible to individual investors.
Investing in global individual shares gives you greater control over your asset allocation, sector exposure, and other criteria important to you. This can help you better align your portfolio to your goals, as well as take advantage of opportunities in the market.
However, with this control comes a greater investment of time to select and manage investments.
Global exchange traded funds (ETFs)
ETFs allow you to diversify your portfolio with one trade, which is attractive for investors that may have lower balances and no interest in picking individual securities.
The other advantage of global ETFs is that they’re easier to invest in compared to managed funds, as they are listed vehicles.
Global managed funds
Managed funds allow you to access professional managers, who can put your money into hard-to-access asset classes, which in turn may also diversify your risk. Managed funds can also be convenient for some, as automatic deposits are generally available to allow you to increase your investment without paying additional brokerage fees.
2. To hedge or not to hedge
When investing internationally, while it is important to consider the performance of the global asset, it is also critical to consider the currency component of the return. This is because currency movements are notoriously difficult to predict and will impact the value of your returns.
One way to address this currency risk is to hedge your global investments.
Currency hedging is like a form of insurance that allows investors to mitigate the currency risks associated with any movements in the Australian dollar relative to other currencies.
While currency hedging can be used in currency speculation, investors should treat currency hedging as a way to manage risk, and not add return.
3. Factor in Taxes
A significant factor that determines an investor’s total return outcome is tax. However, if you’ve invested abroad or considering on investing internationally, you may be unfamiliar with other country’s taxation structure and processes.
Complicating this situation is that taxes in the origin country may be withheld and sometimes exchange rates must be considered for declaration.
To learn more about investing internationally, or to discuss your current or future investment strategy, get in touch for a chat.
Originally published by Morningstar
Mark LaMonica, CFA
Director, Product Management,
Individual Investor,
Morningstar Australasia
