US ETFs vs AU ETFs

Question

Are there any downsides to choosing US ETFs over AU ones? Some of the US ETFs outperform AU ones, but as an Australian citizen are there issues with tax/currency conversion that make investing in US ETFs unviable (or no better than AU ones)?

Answer

Hi Stephanie.

It depends whether you are talking about US ETFs which are listed or domiciled in the US (like VTS for example), or ones which are listed here and simply invest in US shares (like IVV or NDQ)?

There are tax considerations for funds which are listed/domiciled in the US.  While this can be a little confusing, the following article helps explain it: https://passiveinvestingaustralia.com/fund-do...

But if you’re simply speaking more along the lines of Aussie vs US shares, that’s a bit different.  The downsides of investing only in the US are…

1- There’s no guarantee the US (or any market) will outperform in the future.  Diversifying is smart for this reason alone.  On many metrics, US shares are more ‘expensive’ than other markets.  They may be higher quality companies, but this is reflected in their prices.  So US companies being ‘better’ doesn’t necessarily mean they will outperform.

2- Stock market performance often averages out over long periods of time.  This is called ‘reversion to the mean’.  Some decades one market will perform better, and other times, a different market will do better.  For example, the US did terribly from 2000 to 2010, while Australia did great.  The following article highlights this well since 1900: https://www.linkedin.com/pulse/australia-v-us-share-markets-its-our-turn-next-ashley-owen-cfa—dwg9c

3- For Aussies, local shares have unique tax benefits in the way of franking credits.  Overseas investors and other markets don’t have access to the benefits of franking credits like we do.   For this reason, even globally diversified Aussies often choose to have at least some exposure to Aussie shares.

4- Having a solely US portfolio could be problematic when it comes time to live off a portfolio.  All your investments and passive income will be denominated in other currencies rather than Aussie dollars.  This means if the currency moves the wrong way, a 100% US portfolio can severely impact the passive income you can receive from it.

There’s probably more to consider, but hopefully that’s useful.

Cheers, Dave

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