Investing in Overseas Exchange-Traded Funds - dummies

Investing in Overseas Exchange-Traded Funds

Part of Exchange-Traded Funds For Dummies Cheat Sheet (Australia/New Zealand Edition)

Over 3,700 exchange-traded funds (ETFs) are available globally, but only a small number of these (around 60) are listed locally in Australia or New Zealand. For this reason, Australian and New Zealand investors often need to look further afield to get greater choice and diversification for their ETF portfolios.

Regardless of which overseas market in which you choose to buy ETFs, the following applies to both New Zealand and Australian investors:

  • Find a stock broker who can invest in international markets for you. Most of the major brokers can do this for you, but charges and fees vary so do your research.

  • Research the ETFs available. Look at the overseas websites of the major ETF providers, such as iShares, Vanguard, PowerShares, StateStreet. ETF comparison websites from the US can help with providing independent views, as can the likes of research house Morningstar.

  • Investing overseas means currency risk — you can lose or make money on the currency depending on when you invest. You might find you make money on the ETF but lose money when you convert the profits into your home currency. Build currency movements into your returns.

  • Overseas ETFs, especially some listed in the US, can be pretty sophisticated — multiplying an index’s price movements by two or three times, for example. Some borrow money to invest and others move up in value when an index moves down (these funds are called short ETFs). Be careful: Some of these ETFs are designed more for gambling than investing.

  • Tax on overseas investments can be tricky to deal with. Not only are you likely to be taxed by the country in which your ETF is listed, but you may also be taxed on any gains or income in Australia and New Zealand. Buying shares in the US also means filling out a few more forms, declaring you’re an overseas investor and, hopefully, reducing the tax paid in the U.S. Check with an accountant or qualified finance professional before you invest.

  • For New Zealand investors, most Australian shares are exempt from Foreign Investment Fund (FIF) tax and taxed only on dividends, in the same way as New Zealand shares. This exemption applies to companies listed on an approved index of the Australian stock exchange, including the ASX All Ordinaries Index. This means New Zealand investors can use Australian ETFs as a legitimate part of their investment portfolio, bearing in mind the currency risks.