On Monday, leading investment bank Citibank estimated that 16% of the S&P/ASX 200 Index (ASX: XJO) has reported this earnings season, with approximately 92% of companies meeting or beating expectations.
Although the scorecard of Australian stocks is impressive, one thing most Australian investors miss out on every earnings seasons is the benefit of international diversification from foreign markets like America and Europe.
Whilst industry leaders like CSL Limited (ASX: CSL), Brambles Limited (ASX: BXB) and QBE Insurance Group Ltd (ASX: QBE) can insulate somewhat against home-bias (through their respective foreign operations), for true diversification, I think investors need to look further than Australian stocks.
In this regard, I believe exchange traded funds (ETFs) like the BETANASDAQ ETF UNITS (ASX: NDQ) (“NASDAQ 100 ETF”) and Van FTSE Europ Shs (ASX: VEQ) (“FTSE Europe ETF”) are a good starting place.
NASDAQ 100 ETF
The NASDAQ 100 ETF is an ETF administered by the Royal Bank of Canada (RBC). The purpose of the fund is to solely track the NASDAQ-100 Index by passively holding the index-weight of companies that make up the NASDAQ 100.
The very nature of ETFs means the fund is never expected to outperform the underlying index it tracks. However, given the pedigree of companies like Apple Inc, Microsoft Corp, Amazon.com Inc, Facebook Inc and Alphabet Inc (aka Google) that comprise the top 100 stocks on the NASDAQ, it’s safe to say that the NASDAQ 100 ETF gives investors an underlying interest in the technology leaders of today.
Whilst the cost of this privilege is 0.48% in management fees paid to RBC (per annum), I believe this is inconsequential given the likelihood of these technology behemoths growing as the world evolves to new forms of technology.
Accordingly, although the NASDAQ-100 Index trades near record highs today, I believe it plays host to the companies that are the leaders of tomorrow, and thus has a bright future ahead of it.
FTSE Europe ETF
The FTSE Europe ETF is identical to the NASDAQ 100 ETF in that it passively tracks an international index. However, the key difference of this ETF is that it is managed by Vanguard Investments Australia, the subsidiary of the one of the largest money managers in the world, and it focuses solely on European stocks.
Investing in the FTSE Europe ETF provides diversification to some of Europe’s biggest companies like Nestle SA, Royal Dutch Shell plc and Novartis AG for a slightly smaller management fee of 0.35% per annum.
The ETF additionally provides investors a quarterly distribution stream averaging 2.88% per annum and gives exposure to Europe, which many pundits believe presents a contrarian trade opportunity at current prices.
Accordingly, whilst the effects of Brexit and EU turmoil may wreak havoc on individual shares over the next few years, those with faith in the prospects of European economies in the long-term could do well by purchasing this ETF at current prices.
Admittedly, neither ETF is going to give you gangbusters growth. However, as part of a balanced portfolio comprising of core, growth and speculative stocks, I believe these ETFs can provide solid diversification to your core portfolio holdings by allowing investment in sectors (and countries) that have previously been missing from your portfolio.
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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia owns shares of BETANASDAQ ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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