Australian investors miss out as US shares continue to dominate
Does Australia’s bigger dividend-paying sharemarket really deliver the best return for investors?
But take a closer look, and you’ll find it’s not Australian shares that have done the heavy lifting. It’s Wall Street.
US share indices have not just outperformed Australian shares this year, they have beaten them out the door. As it stands, Australian shares are up by around 6 per cent, but US shares are up by about 18 per cent.
If this were a once-off occurrence, we could perhaps brush it off. But that is not the case.
“When you look at Australian retail investor portfolios, Australia is massively over-represented and everywhere else is under-represented,” nabtrade head of investor behaviour Gemma Dale tells The Australian’s The Money Puzzle podcast.
“But then if you look at younger investors, they are much more diversified. They got on top of international investing early and it has made a lot of sense for them.”
Which begs the question: Have you been investing in the wrong sharemarket?
Because when brokers talk of international markets, they really mean the US. Back in 2010, the US represented about 40 per cent of the global sharemarket, as represented by the Morgan Stanley Capital International Index. Today it is a whopping 65 per cent.
And it’s not just that Wall Street raced ahead over the calendar year to date. It’s been going on for many years.
Analysis by The Australian shows US shares have been twice as good as Australian shares over the past 25 years. Since 2000, total US shares returns (S&P 500) were up 348 per cent while Australian shares (ASX 200) were up 158 per cent.
Partners Wealth Group financial adviser Jack Tossol says Australians are conservative.
“We love banks. We love franking credits. We love safe income,” Tossol says.
“We chase tax refunds instead of compounding growth. Australia is a small, concentrated dividend-heavy market. The US is a large, diversified, innovation-driven market. Over long periods of time, innovation always wins.”
Those raw price appreciation return figures comparing Australian and US indices conceals the merits of dividends. Australian shares pay high dividends with an average yield of about 3.5 per cent, though this average dividend yield has recently declined from above 4 per cent. Adding in the benefits of franked dividends will bring the effective Australian dividend yield closer to 5 per cent for many investors. In contrast, the US average dividend yield is only 1.1 per cent.
But that dividend compensation is hardly adequate. The gap is now much too large to ignore.
Dale does not rule out that elevated share valuations in the US may be due for a pullback, but she says that structurally there are long-term investment opportunities on Wall Street that are simply absent from the ASX and this is unlikely to change anytime soon.
“We have hugely different economies, and we do not have these global companies such as Apple,” Dale says.
“Investors who need to live off dividends will have less exposure to the US, and that’s entirely rational. More generally, though, investors are beginning to broaden their portfolios.
“Once upon a time, they bought the big fund managers that specialised in offshore shares, but
to be honest, they are out of fashion now.
“Instead, it is concentrated on the exchange-traded funds. People just say ‘I’m going to get an S&P 500 ETF to get that initial exposure on Wall Street’.”
For investors who believe they have missed out on yet another powerful year of Wall Street gains compared to the relatively modest gains on the ASX, it’s worth keeping in mind it is not always the case that the ASX underperforms. Local stocks beat the MSCI back in 2022.
It may also be some compensation to know the majority of retail investors in US stocks are unhedged, and that has dragged on the effective returns over the last 12 months.
Over the year to date, a standard unhedged ETF such as the giant Vanguard US Total Market Shares is up about 9 per cent. However, to have taken home the full rise on Wall Street would have required a hedged product such as BlackRock’s iShares S&P 500 (hedged) which is up more than 16 per cent.
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Take a look at your super returns this year and you’ll find they have been bumped up once again by shares. The average return on balanced super funds is an above-average 8 per cent for the year to date.