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The allure of investing in US shares is strong: who wouldn’t want to be part of the money-making US giants like Amazon, Microsoft, Apple and last decades top performer Netflix?
Before embarking on your US share investment journey, it is important to understand the different ways you can invest, how much money is needed, what the costs are and what share exposure you are seeking out.
1. Understand the different US indices
The US has four main share indices, the DOW, the S&P500, the Nasdaq composite often referred to as the technology index and the Russell 2000.
The DOW has 30 of the largest US companies indexed off the share price and including names such as Apple, Microsoft, Boeing, Coca-Cola, IBM, Disney, JP Morgan, ExxonMobil and McDonalds.
The S&P500 is the top 500 US shares listed on the New York stock exchange and ranked on a market capitalisation basis.
The Nasdaq composite is an index of some 50 per cent technology shares, biotech, financials and REITS.
Then there is the Russell 2000 index which tracks the smallest 2000 companies listed on the New York Stock Exchange.
By total market capitalisation the New York Stock Exchange is the largest in the world (including the DOW and S&P500) and is valued around US$30 trillion.
The second largest in the world is the NASDAQ stock exchange at US$11 trillion.
The Australian stock market is worth around US$1.2 trillion, so remains a minnow in comparison to the US.
2. Indices matter
Buying US shares is not as simple as buying into the Australian share market.
All these indices and the stocks within them, represent varying sizes, influence and business sectors, and all have performed differently over time (usually depending on economic trends, politics and interest rates).
3. Starting your US investment journey
You a) need to establish what you are trying to achieve and b) which indices (or shares for direct investing) you want to buy.
Direct investing requires a lot more time and research, particularly if you are doing it without an adviser.
The first point to appreciate is that up until recently investing in US shares was expensive and usually only for the very wealthy.
With the development of international online share trading platforms and the evolution of Australian listed ETF’s (exchange traded funds), anyone with an Australian share trading account can buy exposure to the US shares.
A US ETF will offer you exposure to an index of US shares or you can buy US shares directly. Investors can also choose an active share management product that specialises in US shares.
4. Picking the best way to invest in US shares
If we were to assess on the basis of cost and ease of execution, the Australian listed US market ETF is the optimal avenue for retail investors.
You can buy a US ETF on the Australian share market that tracks the performance of different indices like the S&P500 iShares IVV (currently trading around $450-$460 per share) or sectors like healthcare or technology. There is no currency cost as all the ETF’s are quoted in Australian dollars.
Then there are active fund managers that invest in US shares and aim to beat the performance of a benchmark.
It is wise to ensure you understand what the benchmark is, as outperformance may attract what are known as performance fees as well as the standard management fees.
There are different avenues to invest in these fund management products, some are listed on the ASX (Australian stock exchange) and some are purchased via the fund manager.
Lastly, there is direct share investing into US stocks.
You will need to set up your US dollar share trading account that can be done through online platforms or an adviser.
There is the cost of translating Australian dollars to buy US dollars, with the potential currency risk (e.g. the Australian dollar appreciates over time) and you need to complete a US tax form often referred to as the W8Ben.
Investors usually invest directly as a means of gaining exposure to US dollars with the goal of buying their top share picks. Prudence suggests that you do research before starting to invest directly, as it is the costliest and most challenging to navigate given the size and diversity of the US share markets.
In conclusion you need to remember that the ETF products will track the index/sector you select and if you buy into a managed fund or invest directly, the goal is to normally outperform the index or achieve the capital appreciation and dividend (income) stream you aspire to under your investment plan.
Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally. Her experience and knowledge has been combined to help new or existing investors with long term wealth creation and income generation in her first book Shareplicity: A simple approach to share investing. Find out more at www.shareplicity.com.au
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