The Case For Diversifying Internationally
In most countries there exists a strong 'home bias’, a disproportionately large allocation by investors towards their home country assets relative to that country’s weight in global markets. With the Australian economy concentrated on two main sectors –Materials and Financials–broadening your clients investment horizon to international equities can open the doors to the potential to earn smoother and/or higher returns as well as other significant diversification benefits
Over the last 10 years to end June 2019 the S&P 500® Index returned a total 270.3%, compared to the ASX/S&P 200® index which returned 160.0% (both local currency.)1 This highlights the benefits of broadening the portfolio to include international equities–different economies ‘fire’ at different times, which tends to smooth the return stream earned by investors.
By investing in international equities, investors can gain exposure to a much more diverse range of companies that are truly representative of today’s dynamic global economy. Australian equities represent 2.5% of the global stock market capitalisation, so opening the investment horizon globally expands the opportunity set for investing by almost 50 times.2
The Financial sector makes up 32% of the S&P/ASX 200 Index and Materials stocks account for almost 19% of the market capitalisation,3 resulting in an equity market highly concentrated on two cyclical sectors. By broadening the opportunity set to include international stocks, investors can gain greater exposure to companies operating in defensive sectors such as Utilities, Consumer Staples and Health Care, as well as high growth sectors such as Technology.
International stocks provide exposure to countries and industries with their own unique risk-return profiles. Such industries, including pharmaceuticals, biotechnology or internet retail that are underrepresented in Australia, are changing the face of the global economy.
While high dividend yields have been an attractive reason for investing in Australian stocks, broadening investments to include international real estate and international dividend stocks may help investors diversify their risk and increase current levels of income within their equity portfolios.
Australian equities represent less than 2.5% of the global stock market capitalisation,2 with thousands of international stocks, the opportunity really is too big to ignore.
International Stocks May Reduce Risk and Present New Opportunities
Australian equities have delivered strong returns over the last 15 years, in part buoyed by an extended resources boom and being able to avoid the worst effects of the Global Financial Crisis. It’s understandable that investors may be complacent with a strong home bias – they have been rewarded well in the past. However, since the middle of 2011, returns for Australian equities have lagged broader global equity indices. This is one of the challenges of a narrow domestic market.
By broadening a portfolio to include an allocation to international equities, investors can gain the benefits of diversification: minimise the impact from downturns and volatility in the domestic market, while accessing new investment opportunities overseas.
For example, new technologies, a transition away from fossil fuels and the emergence of the China as a significant economic powerhouse on the global stage are changing the face of the global economy. The sharing economy, which is based on the concept of connecting people with activities and services via community based online platforms, is not only reshaping industries but also providing new investment opportunities in companies such as Amazon. Meanwhile, tech leader Tesla is radically changing the future of the auto industry, by delivering both high performance and a lower carbon footprint.
By diversifying overseas, investors can be a part of this change.
International Diversification is Not All Tactical
We believe the argument for international diversification should not be tactical in nature, such as picking a turning point in valuation or currency level. Through international diversification, investors access benefits which are structural in nature and persist through time and market cycles. As a result, we think investors should probably ignore the ‘Is now the right time?’ question, and take a mindset more aligned with ‘time in the market, not timing the market’.
Diversifying one’s portfolio to include an allocation to international equities makes good long term sense: investors gain exposure to a range of different companies, operating around the world, and using history as a guide, stand to gain from significant diversification benefits over time.
With a range of international funds available, investors can tailor their exposure using SPDR ETFs, through a focus on dividend equities, real estate or smart beta:
ETFs provide a transparent, accessible and cost-effective way to construct portfolios. The ETFs listed above provide the building blocks for a well-diversified, professionally managed international portfolio.
We Built the First US ETF
We pioneered ETFs as a simple, cost effective means of investing in the performance of market indices, with all the benefits of listed market liquidity.
With the American Stock Exchange, we developed and launched the SPDR S&P 500® ETF, the first of its kind in the US. Each new member of the SPDR ETF family reflects our intimate knowledge of the ETF market and over 35 years of indexing experience.
As with our first ETF, all our ETFs are physically backed to closely replicate the performance of each index.
1 Source: State Street Global Advisors, as at 31 May 2019.
2 Diversification does not ensure a profit or guarantee against loss.
3 Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.