NOTE FROM PEARLER: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. This does not constitute financial advice and we would urge you to speak to your financial adviser and/or tax accountant for further information.
You might have heard the phrase: “98% of global opportunities exist outside Australia”.
That’s because, as a relatively small country, our share market represents just 2% of global stock market value. And all that value signifies businesses that we could potentially invest in.
Now, we could talk about the UK, as well as European and Asian countries. But the incredible reality is that the United States is home to roughly 50% of this global market value, far ahead of any other country.
So when Aussies are looking to make investments in shares outside Australia, the US is typically the first place we look.
In this post, we’ll discuss why you might want to invest in US shares; the different ways you can do it; and some important things to consider before you do.
Alright, let’s get started.
Why invest in the US?
Given how much our cultures overlap, American companies have been a part of our society for a long while now. And as time passed, they’ve only become even more entrenched in our everyday lives.
Even if we don’t think about it, we see these businesses everywhere. In our homes, in movies, at the shops, on the road. Apple, Google, Tesla, Facebook, Microsoft, Amazon, Nike, Visa, Mastercard, Coca Cola, and McDonalds to name a few.
So, in what ways are US shares different to what we have here in Australia? A few ways, actually; let’s take a look.
Sectors. US shares have a very different breakdown of sectors than we do in Australia. Here, we have very large mining and financial companies (both over 20% of the ASX, respectively). Yet we have little in the way of technology (around 2%). By contrast, in the US, technology dominates their market (over 20%) and they have very little mining (2%). Plus, as alluded to above, the US has extremely strong consumer brands that are sorely missing in Oz.
Global reach. One cool thing about US companies is they typically do business all over the world. Now, that’s obviously not the case for every company. But many of these companies have a large and ever-expanding reach. That means sales and earnings are coming from a broader set of countries and economies, which is a handy form of diversification that isn’t immediately obvious. A business with customers all over the world is likely to be more resilient than one who only sells to locals.
Dividends and growth. The return profile of US shares is also different. Investors in Aussie shares are often used to earning a decent level of dividend income. US shares, however, generally produce a much lower yield for investors. In fact, many of the big names - Google (Alphabet), Tesla, Amazon - don’t pay dividends at all! But in return, US shares tend to produce higher earnings growth (and therefore capital growth) than the ASX. In this way, the two markets complement each other. One is higher growth, lower income, and the other is lower growth, higher income.
Currency movements. For the most part, when we invest in US shares, our money becomes directly exposed to currency movements - specifically the US Dollar versus the Aussie Dollar. When the AUD falls, our US shares become more valuable. And when the AUD rises, our US shares lose value on a relative basis. In practice, these currency movements can either become a drag on our investment or a booster…or somewhere in between. Over the long term, currency movements tend to even themselves out for the most part. But if, for whatever reason, the AUD becomes weaker over time, then owning US shares can improve an investor’s returns as well as purchasing global buying power.
It’s worth remembering that while currencies fluctuate, they don’t compound year after year like earnings growth and share prices. This means they usually aren’t going to be a dealbreaker to your investment.
All the above make US shares a handy diversifier for Aussie investors who may not currently have exposure to global companies. Now, there are a couple of ways to go about investing in US shares. Let’s explore those now.
Different ways to invest in US shares
One way for Aussies to gain easy access to US shares is to invest in a fund that’s listed on the ASX which invests in US companies.
An example of this is the index fund IVV, which is listed in Australia but invests in the S&P 500. But that’s far from the only one. There are tons of different funds - usually ETFs - which invest in different portfolios of US shares.
Another way to invest in US companies more directly is to buy shares (or funds) which are listed on a US exchange. The rationale for choosing funds is pretty straight-forward, and something we speak a lot about here. Funds are more diversified, and simpler to own and manage, giving you the benefits of ownership at much lower risk.
But some people, understandably, have a strong desire to invest directly in companies they really like. This way, they can experience more upside if the company does as well as they hope and expect, versus having just a small piece of it inside a diversified fund.
It’s worth pointing out that the most sensible way to approach this is not by going to the extreme. Wise people, if they choose to pick a few individual stocks, will have these represent a relatively modest part of their portfolio, sitting alongside more diversified assets (If you’re curious, we have a list of the most popular US shares and ETFs).
This might mean owning stakes in a few companies they like, while most of their money is tucked away in set-and-forget type investments they don’t need to think about.
This way, the investor can benefit if the company does much better than the market, plus enjoy the satisfaction of being a direct owner rather than an indirect owner through an ETF. And, importantly, the stakes aren’t large enough to throw their financial progress off course if those particular stocks don’t do so well.
Possible pitfalls and things to consider
Like anything else, it’s a good idea to be aware of the potential problems or downsides. There’s a couple of things I can think of:
Your individual shares (or funds) may do poorly…
While this is a risk with all investments, it’s far more common with individual shares. An index fund may lose a lot of value temporarily, but it’s not going to go out of business (unless society literally crumbles, in which case we’ve got bigger problems!).
It may seem unlikely that today’s winners could face future problems, but technology is moving fast and almost everything can be disrupted. For example, look at the top 10 companies in 2000 on this list. None of those are in the top 10 today. If you have all your hopes riding on a handful of stocks (even if they’re great), your result and therefore your future and financial independence is far less certain.
Tax implications…
Investing in US shares which are listed on a US exchange requires you to fill out a special tax form known as a W-8BEN. This is to establish who you are and your tax status as an international owner of US shares. The W-8BEN form is filled out for you automatically by Pearler if you open a US investment account. Investing in shares listed on a US exchange means you could also be subject to estate taxes from the US government in extreme cases (more info here).
Final thoughts
In my experience, investors don’t seem to need much convincing to start looking at US shares. After all, the companies there are bigger, more more diverse, and sometimes, more exciting than our local firms.
As discussed, there are numerous ways US shares can benefit a portfolio. Of course, there are corresponding risks, and if and how you choose to go about that is completely up to you.
Hopefully this post has helped clarify some of the benefits of investing in US shares.
Until next time, happy long term investing!
