In bygone days, the only way of getting offshore exposure in an investment portfolio was a complicated process involving moving and managing money abroad. While this process is still an option, it normally requires a large chunk of money to be worth the fees. Having assets offshore also complicates estate planning, because you need a will to deal with your foreign assets.
These days we can invest beyond our borders through locally-listed index products. Even better, we can do this within a tax-free environment. The number of international equity ETFs are increasing. The introduction of feeder funds made these investments even more affordable. Diversifying your portfolio using international exchange-traded funds (ETFs) protects your overall net worth from local market and rand weakness.
Buy the USA
Investors seeking to invest in US equities can opt for locally-listed exchange traded funds. While all three funds will give you exposure to companies listed in the United States, each ETF tracks a different index. International giants like Microsoft, Apple, Amazon, Facebook and Berkshire Hathaway are represented in most of these ETFs, with the CoreShares Dividend Aristocrat being a notable exception. While these companies are listed in the United States, they operate and earn revenues across the world. An investment in these ETFs is therefore an indirect investment in the global economy. These ETFs can be bought within the tax-free investment space.
You will see big moves in your portfolio based on the rand/dollar exchange rate, since these ETFs are dollar denominated. The currency moves add an additional layer of volatility to these products, which is why they are best suited to a long-term investment horizon.
The S&P500 index is probably the most famous index in the world. This index tracks nearly 80% of the American stock market, offering investors exposure to the biggest companies on the planet. While this index only tracks companies listed on the New York Stock Exchange, the performance of these companies are also a good indication of the state of the global economy, since many of these companies operate around the world.
The index is weighted by market capitalisation, with information technology companies taking up 27.1% of the index. In the past few years the consumer discretionary sector has overtaken healthcare and caught up to financials, comprising 13.3% of the index. This is one of the cheapest offshore ETFs available to South African investors, with a total investment cost of 0.16%.
This crowd favourite was one of the first offshore ETFs available to South African investors. Formerly the DBXUS, the composition of this USA-based index differs slightly from the S&P 500 index. For one, it has more constituents, weighing it at 635 companies. The higher number of constituents means the weighting of the top 10 companies differs slightly from the S&P500. Information technology also dominates this market capitalisation-weighted index at 27.4%. However, Microsoft and Apple take up the same amount of space.
While the higher number of constituents offers more diversification, the total investment cost for this ETF is significantly higher. At 0.86%, this old timer is currently one of the more expensive ETFs in the market.
Feeder funds differ from ordinary ETFs in an important way – instead of the ETF issuer buying all the underlying shares that make up an ETF, the issuer buys a single ETF from an issuer offshore. The offshore issuer still buys all the underlying shares, making this a true ETF, but twice removed. Just as it’s more economical for an individual to buy an ETF that holds hundreds of underlying shares than it is to buy all the shares individually, it’s more economical for ETF issuers to buy and list an ETF than it is to buy all the underlying shares that make up an ETF.
Inside this Russian Nesting Doll lies the S&P500 we know and love, but at 0.27% you can get your S&P kicks from Sygnia at a lower price.
STANLIB S&P500 Info Tech Index Feeder (ETF5IT)
Information technology has dominated US markets in recent history. This feeder ETF from Stanlib moves away from the broader US market to put all its eggs in the technology basket. Forget about the sub-5% exposure to tech giants like Microsoft and Apple in the broad-market indices. In this index, Microsoft weighs in at 18% and Apple at just under 17%. Of the 505 companies represented in the S&P500, only 68 are included in this index, meaning each company packs a bigger punch. When considering this index, be mindful of the risks involved in buying a sector-specific ETF. Also remember most US-based broad-market indices have a lot of exposure to the technology sector already. When you hold this ETF in addition to a broad-market index, you could be taking on too much sector risk.
Satrix S&P500 (STX500)
Just like the ETF500, Satrix offers exposure to the famous S&P500 index through a feeder fund. Remember, a feeder fund is still an ETF, only Satrix doesn’t hold all the shares in the ETF. Instead Satrix buys the iShares S&P500 ETF, which is domiciled in Ireland. You still get exposure to the S&P500 in dollars, so understanding the S&P500 index means understanding this ETF.
Satrix Nasdaq 100 (STXNDQ)
The STXNDQ is another feeder fund from Satrix. This index invests in non-financial companies listed on the Nasdaq exchange – the second-largest exchange in the world after the New York stock exchange. As the name implies, the ETF invests in 100 non-financial shares with a massive 42.5% exposure to information technology. While it also includes exposure to other sectors, the ETF’s huge technology weighting makes it an alternative to the ETF5IT. While this ETF offers more diversification in number of holdings and sectoral exposure, the same risks apply. Holding this ETF in addition to a broad-market US or World ETF could add sectoral risk to your portfolio. Use with caution.
While all the other ETFs on this list offer exposure to US equities with a smattering of property, this odd little number offers exposure to US debt. The ETF invests in US Treasury Bonds, which are issued in the name of the investor. What this ETF can offer in terms of stability, it lacks in chutzpah. Since US bond rates are fairly low, this ETF offers a way to gain exposure to the dollar with limited scope for growth on the underlying asset. Use as a diversification tool to bring stability to your offshore portfolio, or because you like weird ETFs.
The S&P500 index tracks the 505 largest companies listed on the New York Stock Exchange. All the companies represented in the index has a market cap of $5.3 billion or greater. Due to the sheer size of the index, your exposure to the fate of even the biggest company in the index is limited. 3% of this ETF is invested in listed property, ensuring some built-in asset diversification.
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