The US stock market has just been through one of the most volatile periods in recent memory. This may have prompted investors to reconsider the merits of international investing.
According to the Vanguard 2024 Index Chart, US shares have outperformed Australian shares over the past 30 years. They have increased at a compound annual growth rate (CAGR) of 11.1% compared to 9.1% for Australian shares.
This is a notably wide gap. A $10,000 investment in US shares 30 years ago would be worth $237,318, far outpacing a $10,000 investment in Australian shares, which would be worth $135,165.
Given this level of outperformance, let's revisit some of the reasons to invest internationally.
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Why go global?
Investing in global equity markets provides investors with exposure to a more diverse range of high-quality industries.
The ASX is heavily concentrated among a small number of companies in selective industries. The financial sector is vastly overrepresented on the ASX. It contributes around a quarter of the total S&P/ASX 200 Index (ASX: XJO). This is due to the dominance of the 'big 4' retail banks and investment banking giant Macquarie Group (ASX: MQG).
It is a similar story with the large resources companies. These include familiar names such as iron ore giants BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Metals Group Ltd (ASX: FMG), as well as oil and gas major, Woodside Energy Group Ltd (ASX: WDS).
Then there's pharmaceutical powerhouse CSL Ltd (ASX: CSL), conglomerate Wesfarmers Ltd (ASX: WES), and the two major supermarkets, Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
These companies combined account for over half of the total ASX 200 Index.
While investors often worry most about losing money from their investments, it can be as damaging to your returns to miss out on strong-performing investments. Exposure to industries and specialised companies that are not as prominent in Australia is a key advantage of international investing.
In the US, the first sector that comes to mind is technology. The US is home to the high-profile, magnificent seven companies, which have delivered spectacular returns in recent years. It is also home to streaming giant Netflix and Warren Buffett's legendary investment conglomerate Berkshire Hathaway.
Moving north to Canada, investors can gain exposure to the software industry, which has produced companies like Constellation Software. Meanwhile, Europe is known for its prestigious luxury brands, including LVMH Moet Hennessy Louis Vuitton SE and Ferrari NV.
How to invest internationally?
If you've decided to invest outside of Australia, the next question is how to do it. One way is to buy shares in individual companies. Most brokers offer this option.
Another option, particularly suitable for beginners, is to buy ASX exchange-traded funds (ETFs) with international holdings. These are bought in the same way as any other ASX share and typically charge a small management fee.
The Vanguard US Total Market Shares Index AUD ETF (ASX: VTS), which has nearly 4,000 US-listed holdings, is one of the most popular ASX ETFs. It is known for its outstanding level of diversification, low management fee (0.03% per annum), and impressive returns. Over the past five years, the VTS ETF is up more than 100%.
Those looking for broader geographical diversification may wish to consider the Vanguard MSCI Index International Shares ETF (ASX: VGS). For a management expense of 0.18%, it provides exposure to 1,287 companies, with 73% listed in the US and 27% outside the US. Over the past five years, it has climbed 83%.
By comparison, the ASX 200 Index is up just 47% over the past five years, significantly trailing the VTS ETF and the VGS ETF.
Foolish Takeaway
Investing abroad may be beyond the comfort zone of many ASX investors. However, the benefits can be substantial. It is worth noting that the ASX only constitutes less than 2% of the global equity opportunity and is heavily concentrated in banking, resources, and retail. Expanding your horizons to a global investing universe can provide unique exposure to industries that are simply not available on the local market.
