Investing beyond direct equities

Christine St Anne | 24 Feb 2011

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Christine St Anne is Morningstar's online funds and ETFs editor.

 

A snapshot of a typical Australian investor usually reveals a portfolio heavily skewed towards domestic shares, and in particular, resource and banking stocks. 

Investors can, however, tap into other sectors that go beyond the banking and resource industries, with global equity markets providing further investment opportunities.

Exchange-traded funds (ETFs) can give investors access to these sectors and global sharemarkets can provide greater portfolio diversification.

"The underlying portfolio of a typical investor has a home bias. They tend to be overweight in Australian banks and resource sectors but there is not much exposure to the healthcare or telecommunication sectors," Morningstar ETF strategist Zac Wallis says.

"ETFs like iShares S&P Global Healthcare (IXJ) and iShares S&P Global Telecommunications (IXP) can give investors sector diversification in the health and telecommunication sectors."

While Wesfarmers (WES) and Woolworths (WOW) are some of the dominant consumer staples stocks on the Australian Securities Exchange (ASX), ETFs can give investors exposure to the global consumer staples sector.

Investors can access large global brands such as Walmart, Nestle and Kraft through the iShares S&P Global Consumer Staples (IXI).

But ETFs are not just restricted to sector diversification - investors can also gain access to international markets.

Hillross financial adviser David Kennedy says that a growing number of clients are interested in getting greater exposure to international equities.

Kennedy says the current available offering of ETFs in Australia are focused on international equities, giving investors greater choice.

"There are around 30 ETFs that are exposed to the global equity markets. Investors can access these ETFs that will not only give them access to a global portfolio but can also complement their existing Australian equities portfolio," Kennedy says.

"The benefits of these ETFs are that they offer a cost and tax-effective approach to investing in the global markets."

 

Slice and dice

ETFs can also give investors the ability to implement their global equity views in a number of ways, according to iShares director Tom Keenan.

"Investors can approach ETFs in a granulated way. They can slice and dice the global markets the way they want to," Keenan says.

For example, investors who are now confident in the US recovery story can access ETFs that invest in US companies, such as the iShares S&P 500 (IVV).

"Investing in the iShares S&P500 is a good way to play the US recovery story," Keenan says.

Another way to slice and dice the global markets is by looking at ETFs that give exposure to specific global sectors.

"The iShares MSCI Taiwan (ITW) and the iShares MSCI South Korea (IKO) is heavily skewed to the IT sectors in Taiwan and South Korea. This is another way for investors to take a view on the global IT sector but also in the context of emerging markets," Keenan says.

Current ETFs offering investors exposure to broader emerging markets include the iShares MSCI BRIC Index Fund (IBK) and the iShares MSCI Emerging Markets (IEM).

However, Morningstar's Wallis says investors need to be mindful of not double-dipping into the emerging markets growth story.

"Investing in Australian equities such as resource stocks does give investors exposure to emerging markets, as these stocks are linked to the growth in these economies," Wallis says.

He says investors also must be mindful of the currency risks that are involved with investing in global stocks, given that some ETFs are unhedged.

iShares' Keenan says investors can also diversify their Australian direct equities portfolio by using ETFs that invest in Australian small-cap equities.

"Most Australian investors are heavily skewed towards to the top 20 large-cap stocks. Yet the Australian small-cap sector can provide investors with growth. This sector, however, is more volatile and risky and is harder to invest in because there is less research available," he says.

"An ETF that invests in the small-cap Australian sector provides investors with a cost-effective way to gain access to that sector," Keenan says.

One of the big benefits to investing in Australian shares is of course dividends. Keenan says ETFs do provide investors with dividends.

"All dividends earned through the ETFs are passed through to investors. Investors also have the ability to reinvest their dividends if they wish to," Keenan says.

Hillross's Kennedy says the high dividend-yielding ETFs in the market can play a role in an investor's income portion of their portfolio.

Current high dividend yielding-ETFs include the Russell High Dividend Australian Shares ETF (RDV) and the iShares S&P/ASX Small Ordinaries (ISO).

There is a role for both direct equities and ETFs in a portfolio and each investment strategy is unique to each investor, according to Kennedy.

"It is important that investors understand the role and purpose behind an ETF. These new offerings are proving popular with investors and they can add the necessary diversification benefits," Kennedy says.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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