Fishing in a bigger pond
Most investors would generally agree that the primary goal of investing is to generate the highest possible return for the lowest risk. Diversification can help you obtain this balance. By spreading investments across asset classes, geographies and sectors, investors lower their risks as the poor performance of one investment can be offset by stronger performance in another, and vice versa.
The iShares Core S&P/ASX 200 ETF (IOZ), tracks the internationally recognised S&P/ASX 200 index which comprises the largest 200 companies in Australia by market cap, which gives investors access to more than 80% of the total market capitalisation of the Australian equity market. Close to 50% of the ASX 200 market cap is made up of 10 stocks (including BHP, CBA and CSL) which gives you significant exposure to the very largest companies in Australia today as well as diversified exposure to the remaining 190 stocks by size.
While Australian equities are attractive in terms of dividend yield, the size of the local stock market only represents around 2% of the global market1. This is a small pond to be fishing in for returns and it’s very sector specific too.
Looking at the table below, it’s clear an Australian equity profile works well if you’re building a portfolio that seeks to gain exposure to the financial and mining sectors. However, for a broader set of exposures, for example the technology industry, having a healthy dose of international equities in a portfolio can increase potential for better overall fund performance. It can also reduce concentration risk with broader exposure to assets across sectors and regions.
The iShares Core S&P 500 ETF (IVV), tracks the S&P 500 index giving access to the top 500 U.S. stocks in a single fund including Amazon, Apple, Microsoft, and NVIDIA. Looking at our global exposure, the iShares Global 100 ETF (IOO), you can see an even higher allocation to these ‘Magnificent 7’ tech names, as well as increased weighting to the consumer discretionary sector which is only modestly represented in the Australian market.
