How to invest in the US using ETFs

If you are thinking about investing in the US stockmarket, ETFs can be a great way to start. In this edited extract from her book, Shareplicity 2, Danielle Ecuyer shares how you can do it.

If you are nervous about buying directly into a US stock listed on an overseas exchange, you’re not alone. I’m sure many investors are hesitant to take the first step. You may choose to start investing in US companies through an exchange traded fund (ETF).

For most of us, ETFs can be a great avenue to grow our wealth but as with stocks, though, not all ETFs are created equal. I approach structuring an ETF portfolio in the same way as I select stocks.

First, I ask myself, ‘What am I trying to achieve in buying this ETF?’ Diversification is usually the key to constructing a robust ETF portfolio. The theory is that not all asset classes move together and if you invest in a diverse range of assets, you’ll achieve long-term growth.

The second question you need to ask yourself is, ‘Do I want to buy the ETFs in US dollars and on US stock markets or would I prefer to buy the US ETF products listed in Australia?’

The Australian suite of ETF products permits you to invest without having to worry about currency concerns (with currency-hedged ETFs) or the US’s W-8BEN tax form – the IRS Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). However, the expense cost for some of the overseas themed Australian-listed ETFs can be higher than their US counterparts. Costs such as currency hedging are likely culprits for the differential.

What’s available in Australia

In Australia, BetaShares, iShares and Vanguard are three of the largest and most popular ETF product providers. If you are looking for a summary of ETFs available in Australia, I would suggest you check out marketindex.com.au and bestetfs.com.au.

In the table below, I have summarised the available ETFs that are listed in Australia to offer you exposure to US stocks and themes (with a predominantly large US weighting) to help start you on your research pathway. This is a fast-growing sector in Australia and, barring any market meltdowns, I believe it is safe to assume the offering to Australian investors will continue to increase over time.

Thematic ETFs are very attractive to younger investors who are keen to establish a position in those companies and sectors that they believe are good long-term wealth-making opportunities.

As you can see from the selection in the table, you can achieve exposure to many different themes. ETFs Battery Tech and Lithium ETF (ACDC), for example, is a fund comprising clean-energy themed stocks. The aptly ticker-named ETF ‘HACK’ offers exposure to the cybersecurity megatrend and BetaShares NASDAQ 100 ETF offers exposure to the Nasdaq index (market cap weighted).

Australian ETFs with US exposure

Sources: Market Index, Bloomberg, Canstar, BetaShares, Morningstar. In alphabetical order of ETF provider.

The Australian ETF market is considerably smaller than the US ETF market, however, at around $A100 billion versus the $US5 trillion asset valuation of the US ETF market. Australia’s ETF market is growing, but due to the size, the US market will not only offer you a much broader choice but better liquidity.

Buying US-based ETFs

If you buy directly on the US stock markets, you are taking a currency risk on one hand but also diversifying your exposure. It really is a very personal choice and will depend on your individual circumstances, but, broadly speaking, you will have a greater choice of ETFs in America, just because the industry is that much larger.

As there is just so much to choose from when it comes to the US ETFs, it’s better to research the providers. The top 10 providers are listed below.

Top 10 ETF providers in the US

• iShares (BlackRock)
• State Street SPDR
• Invesco
• Vanguard
• First Trust
• Proshares
• ARK Investment Management
• VanEck
• Direxion
• Wisdom Tree

Direxion ETF products are probably for more sophisticated investors, as the ETFs offered appeal to those who want more complex ETF products, such as geared ETFs or that seek to offer non-correlated market performance. Global X offers thematic ETFs, Wisdom Tree provides specialised ETFs and ARK Investment specialises in actively managed disruptive innovation.

Not only can you buy into US stock-related ETFs, but you can also go shopping, metaphorically speaking, across the globe to secure exposure to some of the higher growth international stocks and themes. Think emerging markets, China, Europe, the UK and Latin America. KraneShares specialises in China exposed ETFs.

I have put together a summary of sectors, themes and indices and some ETFs that offer exposure to each of them. The list is not exhaustive: it provides examples only. The website ETF.com provides a thorough and comprehensive overview of US-listed ETF products.

Summary of ETFs available in the US

Structuring a US ETF portfolio

I am now going to throw some ideas out for you to consider when you are planning on structuring a US-listed ETF portfolio. None of these is meant as advice. The ideas are meant to give you a flavour of what’s on offer and how you might consider some long-term, growth ETFs.

Let’s assume you are positive about the US economy and you want to have an exposure. I suggest you start big and invest in one of the three major indices’ ETFs and then diversify into preferred sectors/themes/country weightings.

As the US economy is one of the world’s growth engines, I would always start with exposure to the S&P 500 to capture many sectors in the economy and global growth via the tech giants. As mentioned, you need to decide whether you are happy with the concentration risk of the large tech stocks and will buy an index fund or you look for an equal-weighted fund.

If the S&P ETF exposure is the backbone of your portfolio, so to speak, you next need to establish what ribs you want to add. You have many options to diversify into different sectors.

For example:

• Infrastructure: PAVE is designed to hold stocks that will benefit from US infrastructure development.
• Dividends: HDV tracks the Morningstar Dividend Yield Focus Index.
• Technology: QQQ tracks the Nasdaq index of the top 100 stocks.
• Clean energy: TAN is the Invesco fund that tracks the MAC Global Solar Energy Index.
• The Chinese market: KWEB is the KraneShares CSI China Internet Fund.
• Emerging markets: IEMG is the iShares Core MSCI Emerging Markets ETF.

The point is, you can mix and match as you go and buy an ETF to suit your needs. If you feel as if you have no idea where to start, the iShares ‘Choose your investment goal’ webpage provides excellent information and offers a selection of iShares ETF products for your risk profile.

Tips for choosing ETFs giving US exposure

Whether you are buying ETFs in Australia or in the US, here is a list of handy hints to assist you in your selection.

Diversify

Don’t pop all your money in one hot-to-trot theme ETF. No matter how positive you are about a secular theme, external factors like the bond market can create swift and dramatic changes in the flow of funds across asset classes.

Look under the bonnet

Always check what stocks the ETF holds and how big the ETF is relative to the size of the stocks. Too much money trying to buy a concentration of stocks can lead to overbought and expensive values. It’s like trying to thread wool through a small needle.

Consider expense ratios

The higher the ratio, the harder it is for the fund to perform for you.

Time in the market

You can buy your ETF holdings over time and always put together a wish list for the ETFs you want to buy and wait for a market pullback.

Be mindful of doubling up

If you buy an S&P 500 ETF and a Nasdaq ETF (such as QQQ, which has a 45% concentration risk on the large tech giants), you are in effect just buying exposure to Apple, Amazon, Microsoft, Tesla, Alphabet (Google) and Facebook, as both ETFs are heavily weighted to the tech giants.

Cyclical/value versus growth

Spend some time establishing what factor stocks you want exposure to and how that correlates to the stage in the economic cycle. Factors include the categories of momentum (think Tesla), value/cyclical (think energy and banks) and quality/defensive (think health care and consumer stocks).

Small caps and the Russell 2000

ETFs for smaller caps or the Russell 2000 index will offer a larger exposure to the real US economy. The tech giants are as much a global barometer as a barometer to US exposure.

Hedging your bets

Being smart doesn’t always pay off. More often than not, trying to hedge your portfolios by buying volatility ETFs (the VIXY ETF tracks the VIX index) or bear/short funds ends in tears. Remember the saying: ‘Don’t fight the Fed!’

Leveraged ETFs

Some ETFs will use derivative structures and debt to increase the performance of the mandate of the ETF. For example, some ETFs will aim to double the movement in the S&P 500 or double the return on a falling market. Leverage adds risk and, unless you really understand the product, I would leave leveraged ETFs well alone.

Consider the NAV

The ‘NAV’ or net asset value of an ETF is usually offered live when you buy the ETF. Use a limit order to make sure you don’t pay too much and can avoid the ETF if it is trading at a premium to the underlying asset value (sum of the stocks included).

This is an edited extract from Shareplicity 2: A guide to investing in US stock markets (Major Street Publishing $34.95), exclusive to Canstar, and republished with permission.

Cover image source: Nana_studio/Shutterstock.com

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