Why young Australians are flocking to US shares to build wealth

Younger Australian investors are increasingly using ASX-listed exchange-traded funds (ETFs) to invest in the US sharemarket as skyrocketing international shares like Nvidia gain popularity.

By the year’s end, US and global shares could account for a combined 70 per cent of Gen Z and Millennial portfolios, with just 30 per cent allocated to Australian shares – a situation that would be the inverse of older Australian investors, as younger investors aim to build wealth more quickly.

Based in Santa Clara, California, Nvidia is now the third-biggest company in the US.Credit: Bloomberg

Both US and Australian share prices have hit record levels in recent times, but it is the stellar performance of US stocks that has led investors to expect a continued outperformance by the US sharemarket over Australian shares. Over the year to April 1, the Nasdaq Composite Index gained 35 per cent, compared to 27 per cent for the S&P500 and a much more modest 9 per cent for the S&P/ASX 200 index.

Over five years, the outperformance is even more striking: the Nasdaq Composite gained 107 per cent compared to 81 per cent for the S&P500 and 28 per cent for the ASX200.

A breakdown in the portfolio allocations of Pearler users (an investing app that I co-founded) indicates they are following the money: US asset exposure has increased by 138 per cent in the two years to March 2024 to account for 50 per cent of total asset exposures – a big jump from 21 per cent in 2022.

That 50 per cent comprises ASX-listed ETFs tracking US indexes (40 per cent), with the rest invested directly in US stocks.

At the same time, the Australian asset exposure of those users has dropped from 44 per cent to 35 per cent. That trend is likely to continue as the world’s largest sharemarket gains in size more rapidly than its Australian counterpart.

ETFs the preferred route to gain equity exposure

Trade data from Pearler reveals younger investors are increasingly using ETFs to access US shares and invest in companies like sharemarket darling Nvidia – now the third-biggest company in the US – as well as other AI-focused hardware and software companies.

Investors are also buying and holding broad-based US equity ETFs that follow the S&P500 to gain exposure to the booming US market, as well as to invest in specific themes such as battery metals, including lithium.

Only one environmental, sustainability and governance-focused (ESG) ETF appears in the top 10, indicating that younger investors are not necessarily adopting ESG ETFs at higher rates than older investors.

The appeal of investing in equities is backed by recently released ABS Household Wealth Data, which shows that household net wealth sat at a record $15.66 trillion in the December 2023 quarter. Of this, direct equity holdings hit a record high of $1.4 trillion after rising 3.8 per cent – or $51.8 billion – during that quarter alone.

It is encouraging to see that Australians have been investing in equities despite rising interest rates and cost-of-living pressures. Listed securities such as ETFs are far more liquid and affordable than residential property, and many investors – especially younger people – are using them as the primary tool to build a home deposit and wealth more generally.

Equities offer comparable, if not superior, returns compared to property over the long run. With young people increasingly being priced out of the property market, we are seeing younger investors buying more heavily into equities, compared to prior generations.

For investors looking to diversify their household wealth, ETFs are a popular investment to boost exposure to the more liquid sharemarket. They’re cost-effective and easy to buy online – unlike property, which often involves a prohibitive level of stamp duty, a huge deposit and other high transaction costs, resulting in plunging homeownership rates in Australia.

Nick Nicolaides is the co-founder of Pearler, an investing app designed to help investors reach their financial goals.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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