The US stock market is back on track. The benchmark S&P 500 Index is once again hitting record highs after jumping 8.6% in the past three weeks.
You may be wondering how you can make money from US stocks.
A few weeks ago, one of my colleagues asked me exactly that question — ‘How can I bet on it? I don’t have an international trading account.’
My colleague wanted to know the easiest and cheapest way to take a punt on the US market taking off. He’s young and is willing to take risks. He had some extra cash and he wanted to gamble.
Well, the easiest and quickest way to invest in the US market is to buy Exchange Traded Funds (ETFs) on the ASX.
Members of the Albert Park Investors Guild are well and truly familiar with ETFs. The Guild has a portfolio entirely made up of ASX listed ETFs and Listed Investment Companies.
ETFs are products that combine the features of managed funds with that of regular shares. They typically aim to mimic the performance of a certain market index — in this case, the S&P 500 Index in the US.
The ETF buys all the companies that are a part of the index. In the case of the S&P 500, that includes stocks like Apple and Exxon Mobil.
The ETF then issues units in the fund. These can be bought and sold like regular shares on the stock exchange. The advantage to you is that it gives you access to a broader range of investments than would be available otherwise.
They also help manage your risk. ETFs have lower risk than individual shares because they are diversified. They are also cheaper, more transparent, and easier to buy and sell than traditional (unlisted) managed funds.
Some of the Australian ETFs that invest in the US market are
- The iShares Core S&P 500 ETF [ASX:IVV] which tracks the performance of the S&P 500 Index. Management costs are 0.07% per year, and it pays a quarterly dividend.
- The Vanguard US Total Market Shares Index [ASX:VTS] provides exposure to more than 99.5% of the US stock markets, so includes large, mid, small and micro-cap shares traded on the NYSE and NASDAQ. It also pays dividends quarterly and has management fees of 0.05%
- The iShares Core S&P Small-Cap 600 ETF [ASX:IJR] holds more than 600 US shares with market caps of US$300 million to US$1.4 billion. It charges management fees of 0.14% per year.
- The iShares Core S&P Mid-Cap 400 ETF [ASX:IJH] invests in 400 mid cap US stocks with market caps of between $1 billion and $4.4 billion. It pays quarterly distributions and also has management fees of 0.14%.
- The iShares Russell 2000 ETF [ASX:IRU] is another small cap focussed ETF. It invests in 2000 small cap US stocks that make up the Russell 2000 Index. Management fees are 0.20%.
I recommended one of these US focussed ETFs in the Albert Park Investors Guild in August. Thanks to the rising US market and favourable exchange rate, it’s returned Guild members 11.3% to date. That certainly beats the ASX’s flat return since then.
Your second option to profit from international stocks
An international trading account also gives you access to a much wider range of ETFs that are not on offer at home. The US has 1,375, offering an array of investment opportunities. There are close to a hundred ETFs listed on the ASX.
Here are a few that you won’t find at home:
- Russell 1000 High Volatility ETF (HVOL) — holds the 200 most volatile US stocks.
- ProShares UltraShort Gold (GLL) — takes a leveraged short position in gold.
- Credit Suisse Global Warming ETN (GWO) — invests in companies with products or services tied to combat global warming.
- Global X Lithium (LIT) —invests in lithium mining companies and lithium battery manufacturers.
Opening an international trading account isn’t hard. A number of Aussie broking firms offer international share trading. Some reputable ones are CommSec Online Trading, Westpac Online Investing, e*Trade, and Bell Potter.
Your current broker may even have access to international exchanges. If you’re not sure, call them and ask.
All you’ll need to do is complete some paperwork. It might take a couple of days for you to be set up and ready to trade.
The broker should also give you a form — a W8-BEN — that will reduce the withholding tax on US dividends to just 15%. This tax will be paid before you even see the dividends in your account. You might want to ask if about how to take advantage of the Australian-US tax treaty, allowing you to offset this tax against your Australian taxes.
Remember to check the broker’s fees. They’re generally around $60 per trade, plus you’ll be charged currency conversion fees. These costs are higher than trading stocks in Australia, so be aware of them, but don’t let that put you off.
Even if you don’t wish to bet all you money on the US market, it’s a good to have some foreign investments in your portfolio. Diversifying across economies and currencies and into sectors not available locally can help boost your returns and reduce your risk. Sounds like good investing to me.
Investment Director, Albert Park Investors Guild