Riding growth wave of US and Australian markets is easy with ETFs
Investors looking for diversification across whole markets should look at adding ETFs, such as IVV or IOZ from iShares, to their portfolio.
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They are known as the Magnificent Seven.
In the first half of 2023, technology stocks Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla powered the American share market to record highs, underpinned by investor excitement about the potential for artificial intelligence to supercharge their business models.
Australian investors in the iShares S&P 500 ETF (ASX: IVV) enjoyed a five-month-long bull market before those gains were tempered in August amid a more cautious approach from investors.
The iShares S&P 500 ETF tracks the S&P 500 index, long considered the bellwether of the US economy, giving access to the top 500 U.S. companies in a single fund.
“Investing in the iShares S&P 500 ETF not only gives you exposure to the top 500 US stocks in a single fund, but it also gives you exposure to changes in the AUD-USD exchange rate which can have an impact to your investment returns,” said BlackRock Australasia’s Head of Wealth Solutions, James Kingston.
When the value of the Australian dollar falls, unhedged investors see their gains magnified when the value of their investments are converted back into Australian dollars.
“Investors wishing to reduce the impact of currency risk may also consider allocating some of their investment into a currency hedged version of the ETF such as the iShares S&P 500 (AUD Hedged) ETF (ASX: IHVV).”
More broadly, adding IVV or IHVV to a portfolio can also provide investors with exposure to powerful investment thematics such as the rise of Artificial Intelligence and the transformation of the global healthcare sector.
Healthcare giants UnitedHealth Group, Lilly, Johnson & Johnson, Merck, AbbVie and Pfizer are all major contributors to the market capitalisation of the S&P 500.
While Australian equities are attractive in terms of dividend yield, Kingston said, Australia only represented around 2 per cent of the global financial market.
He said it was a “small pond to be fishing in for returns” in a market with heavy exposure to the financial and mining sectors.
“Investors looking to increase potential for overall fund performance and reduce concentration risk with broader exposure to assets across sectors and regions should look to include international equity ETFs in their portfolio,” he said.
If you’re looking to invest in Australian equities, the iShares Core S&P/ASX 200 ETF (ASX: IOZ), is comprised of the top 200 companies listed in Australia.
Launched over 20 years ago, the S&P/ASX 200 index is considered the de facto measure of the value and performance of the Australian stock market. The total market cap of companies included in the S&P/ASX 200 increased from just over $A600 billion at launch in 2000 to over $A2 trillion in 2023.
With an average return of almost 8 per cent per annum since launch, the S&P/ASX 200 has served as a solid foundation for the growth of index-based investing in Australia.
“With billions of dollars traded every day linked to the S&P/ASX 200, the index provides a deep ecosystem of liquid, tradable products,” said BlackRock Australasia’s Head of iShares Product and Platform, Steve Ead.
“We have seen significant growth in S&P/ASX index-linked products and their increasing trading volumes over the past two decades, including for example S&P/ASX index-linked futures and options over the past twelve months ending in July 2023” said S&P Dow Jones Indices Director of Global Equity Product Management, Sean Freer.
Importantly the IOZ, IVV and IHVV products also offer the trademark advantages of every iShares ETF: diversification, liquidity, transparency and cost efficiency.
“With these specific ETFs you are essentially buying the market in one trade. You aren’t taking any individual big bets and you can stay invested over time. The deep liquidity in the indexes, supported by highly traded derivative contracts, means that investors can easily enter or exit the market if their views or situation changes.” Ead said.
Kingston points out that you could think of your investment portfolios as a core and satellite construction.
Core represents broad-based, lower-cost exposures. Satellites might be higher conviction bets in a specific geography or sector based on your personal views.
“You can create a whole portfolio with ETFs from broad to more sector-specific and targeted exposures. Your entire investment portfolio could be made up of ETFs or complemented with other investments like managed funds and direct property. But the core-satellite approach is key,” he said.
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This content was produced in association with BlackRock. Read our policy on commercial content here.
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