A white paper produced by the ETF division of SSgA entitled ‘Strategies for International Asset Allocation’ said while there has been a resurgence of interest in international equities, Australian investors “remain largely underexposed to international equities as an asset class”.
SSgA said increasing the allocation of a portfolio to international markets can “improve portfolio performance and the potential for higher long-term returns, while reducing risk through more effective diversification”.
“Historically, international equities have shown varied correlations to both Australian equities and bonds,” SSgA stated.
The paper said an analysis of asset class returns for the 10-year period between January 2004 and February 2014 by State Street Global Advisors shows shifting 10 per cent of the capital from domestic equities to international equities in a portfolio split between Australian and international equities and bonds results in reduced risk and increased return.
Despite these benefits, SSgA said many Australian investors still have a minimal allocation to international equities.
The paper said this low allocation could be due to the “administrative and financial barriers that frequently discourage investors from accessing overseas markets”.
It argued that ETFs are one way investors are overcoming some of these barriers to overseas investing, given ETFs can be bought and sold in moments on the ASX; can remove currency risk if it is a hedged ETF; and offer “low management costs both on and offshore”.
The paper noted, however, that in the case of ETFs domiciled in the US and cross-listed on the ASX, investors may still need to complete US tax forms to reclaim withholding tax on dividends paid by the ETF.
“This structure also results in additional withholding tax where the ETF invests in non-US shares.”
