Did you know that 98% of all investment opportunities exist beyond Australia’s shores? The Australian Stock Exchange accounts for only 2% of global share markets, leaving a vast world of potential investments untapped for those who focus solely on domestic markets.
However, despite these figures, 54% of Australian investors have no international exposure in their portfolios. Due to this home bias, many Australians miss out on up to 97% of the company value globally. Additionally, investing in international shares offers significant benefits, including diversification across different geographies and sectors, exposure to high-growth markets, and potential currency advantages. Furthermore, international investing can help mitigate risk if markets in one country fall, thereby providing more stability to investment portfolios.
This article examines the reasons why more Australians are expanding their financial horizons through international stocks and exchange-traded funds (ETFs), the potential advantages and disadvantages of these investments, and effective methods for gaining exposure to international markets.
Australia’s Home Bias and Global Market Reality
The Australian investment landscape presents a striking paradox when viewed in a global context. Australian investors have traditionally shown a strong preference for domestic assets; however, the local market represents only a fraction of the global investment opportunities.
ASX’s 2% Share of Global Equity Markets
When examining global equity markets, the Australian Securities Exchange (ASX) accounts for only 2% of the worldwide total. This small footprint means Australian investors who limit themselves to domestic securities effectively ignore 98% of global investment possibilities. Moreover, this limited market share impacts liquidity and trading volumes, potentially affecting price discovery and market efficiency compared to larger international exchanges.
Home Bias in Australian Portfolios: Survey Insights
Research consistently reveals that Australian investors demonstrate a pronounced “home bias” – the tendency to overweight domestic assets in investment portfolios. This phenomenon extends across both individual and institutional investors. Notable studies indicate that while financial advisers generally recommend allocating 35-40% of equity investments to international markets, the actual allocation in practice often falls significantly short of this target.
Several factors contribute to this home bias:
- Familiarity with local companies and markets
- Tax advantages like franking credits on Australian dividends
- Perception of higher risk in foreign investments
- Currency risk concerns
- Higher transaction costs for overseas investments
Impact of Limited Sector Exposure in ASX
The ASX lacks diversity across sectors, presenting a substantial limitation for investors seeking broad exposure. Specifically, the market is heavily concentrated in financial services and resources, which together account for approximately 50% of the ASX market capitalisation. Essentially, this means that investors with ASX-only portfolios have significant exposure to the banking and mining sectors, while missing opportunities in growth industries.
Technology and healthcare, two of the fastest-growing global sectors, are particularly underrepresented on the ASX. In contrast, international markets offer extensive exposure to innovative tech companies and pharmaceutical giants that are driving worldwide economic growth. This sector imbalance potentially limits returns for Australian investors who avoid international investments, particularly during periods when resources and financial services underperform relative to other sectors.
Why Australians Are Turning to International Shares and ETFs
Australian investors are steadily increasing their allocations to global markets, prompted by compelling advantages that international exposure offers. The trend reflects a growing recognition that looking beyond domestic shores can significantly enhance portfolio outcomes.
Access to Global Growth Sectors like Technology and Healthcare
The ASX offers limited exposure to several high-growth sectors that are well-represented internationally. Notably, the technology, telecommunications, and healthcare industries are underrepresented in Australia. This sector gap means investors focused solely on domestic markets miss opportunities in industries driving global innovation and growth.
Healthcare alone accounts for 10.2% of global GDP, with the telemedicine and digital health market projected to reach AUD 1203.32 billion by 2028. Likewise, biotechnology is gaining momentum with promising opportunities in oncology and rare diseases. These sectors present substantial growth potential, which is currently absent from Australia’s resource- and finance-heavy market.
Diversification Across Economies and Currencies
Investing across multiple countries and industries provides a powerful buffer against volatility in a single market. According to investment experts, spreading investments across various countries and industries creates opportunities for better performance whilst protecting against falls in any particular market.
Additionally, investments in foreign companies that use different currencies may act as a hedge against fluctuations in the domestic currency. This currency diversification adds another layer of risk mitigation, especially valuable during periods of Australian dollar weakness.
Reduced Reliance on Australian Economic Cycles
Performance data clearly illustrates the benefits of global exposure. Over the past decade, international investments have substantially outperformed Australian equities:
- Australian shares: 7.2% (5-year) and 9.4% (10-year) returns
- US shares: 13.8% (5-year) and 17.6% (10-year) returns
- Global shares: 10.1% (5-year) and 14.1% (10-year) returns
Furthermore, international investing provides access to economies growing faster than Australia’s, such as India or Brazil. This exposure to varied economic cycles helps create portfolio resilience through economic downturns that might disproportionately affect the Australian market.
Henceforth, ETFs have made international investing increasingly accessible, enabling ordinary investors to gain exposure to thousands of global companies through simple ASX trades.
Understanding the Risks of International Investing
While international investing offers excellent opportunities, understanding the associated risks remains vital for making informed investment decisions.
Currency Risk and Hedging Options (e.g. VGAD vs VGS)
Currency fluctuations can substantially impact returns on international investments. When investing abroad, Australians are exposed not only to asset performance but simultaneously to foreign exchange movements. Historical data shows hedged versions of global equity benchmarks delivered marginally higher returns (9.3% p.a.) than unhedged versions (8.9% p.a.), though with greater volatility (14.5% p.a. versus 11.6% p.a.).
The AUD/USD exchange rate has fluctuated dramatically since floating in 1983, trading as low as 0.479 USD and as high as 1.102 USD. This volatility creates both risks and opportunities.
Political and Regulatory Risk in Emerging Markets
Political instability increasingly affects investment outcomes globally. Initially considered mainly a concern for emerging markets, political risk now extends to developed economies as well. Factors such as government instability, regulatory changes, and economic volatility can dramatically alter investment returns.
The frequency of market shocks in emerging markets has doubled since the global financial crisis, with 20 of the worst 30 drawdowns occurring after 2008. Additionally, changes in political landscapes can trigger currency devaluations, capital controls, or even asset seizures, as demonstrated by the case of an Australian company that was awarded AUD 137.61 million after the Tanzanian government unlawfully seized a nickel deposit.
Liquidity and Market Access Challenges
Contrary to conventional wisdom, markets typically continue functioning during crises rather than shutting down completely. Nevertheless, trading costs increase as bid-ask spreads widen and prices change more with each dollar transacted. Market participants should prepare for these potential challenges, recognising that liquidity constraints may impact sustainability perceptions and complicate investment timeframes.
How Australians Are Investing Internationally
Australians now have multiple pathways to access global markets, each offering distinct advantages for different types of investors and goals.
ETFs vs Managed Funds vs Direct Shares
The decision between investment vehicles typically comes down to costs, control, and convenience. ETFs have gained substantial popularity due to their significantly lower fees—often charging just 0.07% p.a. for broad market exposure, whereas similar managed funds may charge between 1-2% p.a. Over 40 years, this fee difference can result in ETFs outperforming equivalent managed funds by approximately 59%. ETFs also offer greater transparency, with most providing daily portfolio updates, unlike managed funds, which typically disclose less frequently.
Alternatively, direct international share ownership provides maximum control but requires more research and typically incurs higher transaction costs.
Using Online Brokers for Global Market Access
Online brokers currently serve as the primary gateway for Australians investing internationally. Platforms like Interactive Brokers offer access to over 10,000 US stocks and ETFs across 160 markets in 28 currencies. Transaction costs have decreased substantially, with trades on US markets ranging from AUD 1.53 to AUD 91.66. Indeed, most platforms provide access to major exchanges, including the NYSE, NASDAQ, the London Stock Exchange, and Asian markets.
Role of Super Funds in International Exposure
Superannuation funds offer a straightforward path to global markets for many Australians. Funds like Aware Super provide international share options that track indices such as the MSCI World ex-Australia. These options are often passively managed with fees as low as 0.06%.
Morningstar and Vanguard Tools for Global Investing
Research tools facilitate informed decision-making. Morningstar Investor offers dedicated resources, including Global Equity Best Ideas and comprehensive research reports on international securities. Vanguard offers low-cost international ETFs, such as their MSCI International ETF (VGS), which provides exposure to companies from approximately 23 different countries.
Conclusion – International Investing
Australian investors are increasingly recognising the significant opportunities that lie beyond domestic shores. The statistics speak for themselves – with the ASX comprising merely 2% of global sharemarkets, a world of untapped potential awaits those willing to expand their investment horizons. The heavy concentration of the Australian market in financial services and resources creates an inherent limitation for investors seeking diverse sector exposure. Therefore, international markets offer access to high-growth industries, such as technology and healthcare, which are often underrepresented domestically.
Diversification stands as perhaps the most compelling reason for global investment. Spreading capital across different economies and currencies helps shield portfolios from the volatility of a single market. Furthermore, performance data clearly demonstrates the advantage: international investments have consistently outperformed Australian equities over both five- and ten-year periods.
ETFs have emerged as particularly popular due to their lower fees compared to managed funds, offering a cost-effective way to gain broad international exposure. Additionally, online brokers now provide straightforward access to major global exchanges, while super funds offer another pathway for Australians seeking international diversification.
Ultimately, expanding beyond Australia’s shores represents not just an opportunity but almost a necessity for investors aiming to build truly diversified portfolios. Though the home bias remains strong, more Australians are beginning to recognise that limiting investments to domestic markets means missing out on 98% of what the investment world has to offer. As global markets become increasingly interconnected, this trend toward international investing is likely to continue growing, benefiting those forward-thinking enough to participate.
Why should Australians consider investing in international shares and ETFs?
Given that the Australian market makes up only 2% of the global share market, investing abroad gives access to a wider variety of alternatives. It offers exposure to high-growth sectors, such as technology and healthcare, which are underrepresented in Australia, and helps diversify portfolios across different economies and currencies.
What risks are associated with international investing?
The primary risks include currency fluctuations, which can impact returns; political and regulatory risks, especially in emerging markets; and potential liquidity challenges in some foreign markets.
How do ETFs compare to managed funds for international investing?
ETFs typically offer lower fees, greater transparency, and more frequent portfolio updates compared to managed funds. For example, some international ETFs charge as little as 0.07% per annum, while similar managed funds may charge 1-2% per annum. This fee difference can have a significant impact on long-term returns.
Can Australians invest in international markets through their superannuation?
Yes, many superannuation funds offer international share options that track global indices. These options are often passively managed with low fees, providing a straightforward way for Australians to gain international exposure through their retirement savings.