5 ways to invest in US stocks from Australia
Investing in what you consume is an increasingly popular approach, especially for new investors looking to get started.
Online shopping? Invest in Amazon.
Binging on TV shows? Invest in Netflix.
Scrolling through your iPhone? Invest in Apple.
The chances are the majority of the companies will be American. This is not really surprising given that the US has by far the world’s biggest stock market, making up about 60% of the total globally.
But how do you actually invest in these companies?
There are a number of different ways. Investing is becoming increasingly accessible, with a range of new platforms that make it easier and cheaper for everyday people to invest. But for new investors it can feel very confusing.
We’re going to take a look at 5 different ways that you could invest in US companies.
Investing in shares of individual US companies
Investing in index funds or ETFs on the US stock exchange
Investing in ‘US-domiciled’ ETFs on the ASX
Investing in ‘Australian-domiciled’ ETFs on the ASX
Investing in US stocks via a global ETF
There’s no right or wrong way to do it, but we’ll look at a few of the pros and cons for each option.
1. Investing in shares of individual US companies
The most obvious way is to invest directly in the companies you want. To do this you’ll need to use a broker or platform that allows you to trade on the US stock exchange - the New Stock Exchange (NYSE) and the NASDAQ. Many of the Australian platforms now offer this service, including Stake, SelfWealth, Pearler and many of the big banks.
If you’re considering this approach it’s worth being aware of a few key considerations:
Consideration 1. You’ll have to convert your local currency into US dollars, which as you might be aware if you’ve ever been overseas on holiday, will come with some sort of conversion fee. This could either be a flat fee or it could be sneakily wrapped up in a less favourable exchange rate. Either way, you’re likely to be down by a percentage before you’ve even started.
Consideration 2. You’ll also need to factor in any US tax requirements. Investing directly into US stocks (which are ‘US-domiciled’) means that you’re subject to US tax laws. Without boring us both with tax and legal speak, this means 2 things:
The US has severe ‘estate tax’ laws for non-US citizens. When you die, if your country of residence doesn’t have a tax treaty with the US Then you will have to pay a hefty chunk of your assets to the US government. I’m sure you’ll agree that’s not a great outcome. Fortunately, Australia has a tax treaty with the US so you can avoid this estate tax…if you complete a W8BEN form every 3 years. It means extra admin but some brokers will do it for you automatically.
The US withholds 30% tax on dividends. The good news is that as long as you’re up to date with your W8BEN form then this is reduced to 15%.
Consideration 3. Investing in a small number of individual companies is generally considered a higher risk strategy than a large number of different companies. If one company goes downhill then it’s likely to have a much greater effect on your overall portfolio. To get around this you could invest in more companies, but this is likely to be more time consuming to manage (regular investments, tracking your performance, completing your tax return) and potentially more costly if you have to pay a brokerage fee each time you contribute extra money to your investments. Don’t worry, we’ll look at alternatives later on.
Let’s recap on the pros and cons of this option.
Pros:
Direct access to the companies you want
Cons:
Currency conversion fees
US tax requirements
Low diversification (potentially higher risk)
So what are the alternatives?
2. Investing in index funds or Exchange Traded Funds (ETFs) on the US stock exchange
Investing in an Index Fund or Exchange Traded Fund (ETF) that tracks a US market index can give investors access to hundreds or even thousands of US-listed companies.
There are a range of ETFs available which can be bought and sold on the US stock exchange, just like individual shares.
The Vanguard Total Stock Market Index Fund ETF (VTI), which as the name suggests tracks the entire US stock market, is a popular choice with investors as it gives access to over 4,000 companies of all sizes.
Another option is an ETF that tracks the S&P 500 companies, which is made up of (yes, you guessed it) 500 companies which are considered to be the biggest and/or most important companies in the US. This includes famous names like Apple, Amazon, Google and Microsoft. There are several S&P 500 ETFs available on the US stock exchange, including the Vanguard 500 Index Fund ETF (VOO) and the SPDR S&P 500 ETF Trust (SPY). Both are incredibly low cost and offer huge diversification.
Problem solved? Not quite
The downside of this approach is similar to the previous one. These ETFs are still traded on the US stock exchange (‘US-domiciled’), so the issues of currency conversion and US tax laws don’t go away. But again, don’t worry, there are alternative options that we’ll get to soon.
Before we do, let’s quickly recap on the pros and cons of this option.
Pros:
Diversification at an ultra low cost
Cons:
Currency conversion fees
US tax requirements
3. Investing in ‘US-domiciled’ ETFs on the ASX
The good news is that there are ETFs that are listed on the ASX that offer exactly the same thing as VTI, VOO and SPY. Being listed on the ASX means that they can be bought and sold in Australian dollars (hooray!) so we can wave goodbye to currency conversion fees.
The direct equivalent of VTI is the Vanguard Total Stock Market ETF (VTS). It provides access to the same range of companies as VTI at an incredibly low cost of just 0.03%, and it’s in Australian dollars.
There is also a direct equivalent of SPY, which confusingly is also called SPY - SPDR S&P 500 ETF Trust AUD. This one is in Australian dollars though.
Ok, so have we solved the problem? Yes, but only partly.
We’ve now got ETFs that don’t require us to convert our Aussie dollars to US dollars. And we’ve still got huge diversification. But unfortunately the tax issue still remains.
VTS and SPY are both “cross-listed”, which means that they’re actually just the US versions listed on the Australian market. We touched on the ‘US-domicile’ issue earlier. It means that the ETF is registered and regulated in the US and is therefore subject to US tax law. So although they’re available to buy in Australian dollars there is still a requirement to fill out the US tax paperwork and the uncertainty over whether Australia and the US will still have a tax treaty in 10, 20 or 30 years from now.
Let’s recap on the pros and cons of this option.
Pros:
Diversification at an ultra low cost
No currency conversion required
Cons:
US tax requirements
4. Investing in ‘Australian-domiciled’ ETFs on the ASX
Fortunately there is a solution to our problem.
Australian domiciled ETFs can give us exactly the same thing that we would be getting from the ETFs we’ve already discussed, but without the headache of the US tax requirements.
iShares S&P 500 ETF (IVV) is an Australian domiciled ETF that holds the same companies as VOO and SPY. Because it is registered and regulated in Australia there are no pesky US taxes to deal with. It’s also still super low cost, with an expense ratio of just 0.04%.
Note: There is also an IVV traded on the US stock exchange, so make sure you check which one you’re looking at!
Unfortunately there isn’t a direct equivalent to VTS that is Australian domiciled, so investors have to find creative ways to get exposure to the entire US market if they so wish, or stomach the US tax requirements.
Let’s recap on the pros and cons of this option.
Pros:
Diversification at an ultra low cost
No currency conversion required
No US tax requirements
Cons:
No way of investing in the entire US market using this approach
5. Investing in US stocks via a global ETF
I’m going to include this one simply as another option. We’re all different and we all have different ways of investing.
Our final option is to invest in global ETFs on the ASX. These give investors access to countries from around the world, which can mean even greater diversification.
The US stock market makes up 60-70% of the total world market, so for many global ETFs the US makes up about this percentage of the total holdings.
So if you also want international exposure, and like to keep things super simple by holding as few ETFs as possible, then global ETFs can be a great way to get the best of both worlds (pun intended).
One example available on the ASX is the Vanguard MSCI Index International Shares ETF (VGS). VGS is a popular choice as it provides access to over 1,500 large companies from developed countries around the world. This includes practically all of the S&P 500 companies from the US, plus companies from across Europe and parts of Asia. To put it into perspective, about 70% of the total value of VGS comes from the US.
Global ETFs do tend to be slightly more expensive though. VGS, for example, has an expense ratio of 0.18% which is still low in the grand scheme of things, but is significantly higher than IVV and other US-only ETFs.
Let’s recap on the pros and cons of this option.
Pros:
Even greater diversification across multiple countries.
No currency conversion required
No US tax requirements
Cons:
Higher cost (expense ratio)
Only includes large US companies (i.e. those in the S&P 500)
Summary
Like we said right back at the start, there is no right or wrong answer here. Different people will want different things. Weigh up the pros and cons based on what you value most.
You may prefer the freedom of investing in individual companies and see the extra 400-odd that come with an ETF as watering down your gains. It’s a higher risk strategy but that might be what you want.
You may like the idea of investing in ETFs on the US stock exchange. Maybe you already use it for other investments? In that case you might be comfortable with the currency conversion costs and happy to manage the US tax requirements.
You may prefer to invest on the ASX with ETFs like VTS and SPY that give you access to US companies but traded in Australian dollars. The US-domicile issue might be important to you or it might not. But it’s certainly a factor to consider.
Or you might want to keep things super simple. Why hold more ETFs than you need to? If you’re planning to invest in global companies anyway, then you might want to consider investing in a global ETF that gives you companies from the US and other countries all together.
