International Shares for Aussie Dividend Investors – Where Does It Fit?

International sharesInternational shares.

They’ve provided incredible returns in recent years.

And Aussie investors are wondering how much they should have allocated to this area.

This question is even more common in the Financial Independence space.

Early retirement chasers are torn between the dividends on offer in Australia, and the growth prospects of International shares.

So today, we’ll be playing around with some numbers and comparing some of the available choices.  That is, portfolios with different amounts invested in Aussie and International shares.

Before your eyes glaze over, don’t worry, it’s all pretty simple stuff!

Hopefully this gives us a clearer picture to look at.  And the aim is, it makes for simple comparisons if you’re currently thinking about diversification, and how that might affect your investment income.

 

Disclosure

Now, obviously I’m no expert and none of this stuff is advice.  I’m just laying out some numbers for you.  Only you can decide what’s best for you.

That’s because everyone has their own preferences, comfort zones and risk tolerance.

But I will share what our personal approach is and why it makes sense to me.

Also, I’ll just say, there’s far too many variables to go into to keep everyone happy.  It’s just a general outline of my thoughts.  And this post is long enough as it is!

 

Assumptions

We’re making pretend portfolios here.  So the numbers we’re working with, can change.

Really, the only accurate number we have, is the current dividend yield.  The rest we are guessing (more or less).  And the figures I use are my own simple estimates.  In other words, don’t shoot the messenger!

Hopefully they’re in the ballpark, but feel free to use your own figures.

So, I’m going to assume Aussie shares and International shares, perform roughly the same over the long term.

Some of you may already think that’s nonsense.  But these two markets have done this, on average, for over 100 years.  (The article uses US shares as an international comparison, being the largest global sharemarket with the most available data.)

If 100 years isn’t good enough, what is?

And I’m not talking about returns over the next couple of years here.  Obviously, anything can happen in that short amount of time.  I mean long term, as in 20-30+ years.

But, the point is not to compare markets.  It’s to compare portfolios, and the options you have.

And to make it simple, we’ll use plain vanilla index funds in these pretend portfolios – Vanguard Australian Shares Index Fund (VAS), and Vanguard’s International Shares Index Fund (VGS).

Of course, we could do this using Aussie LICs.  But let’s just keep it ultra simple for today.

For those unsure, these are both ETFs you can buy from your online stockbroker.

 

Long-Term Returns

Let’s assume both Oz and International shares will earn a long-term return of 8% per annum.

Breakdown for each 8% return is as follows…

In Australia, that means an average dividend yield of 4.3%.  Plus growth of 3.7%.

(And the dividends from VAS are around 75% franked, which means the gross yield becomes 5.7%)

For International shares, that means the current dividend yield of VGS – 2.3%.  Plus growth of 5.7%.

Still with me?

OK great.  So far, so good!

Now, using the above figures, let’s look at the four simplest portfolio options you have available as an Aussie investor.  And what type of income and growth we can expect from those choices…

 

100% Aussie Shares (VAS/LICs)

5.7% gross dividend yield.  3.7% growth.

 

75% Aussie Shares.  25% International Shares.

4.85% gross dividend yield.  4.2% growth.

 

50% Aussie Shares.  50% International Shares.

4% gross dividend yield.  4.7% growth.

 

25% Aussie Shares.  75% International Shares.

3.15% dividend yield.  5.2% growth.

 

0% Aussie Shares.  100% International Shares.

2.3% dividend yield.  5.7% growth.

 

Observations

For those of you who are still awake, well done!

On first glance, it appears that Aussie shares will have the highest return, due to franking credits.  But this isn’t fair to say.  Because many of you are working and saving hard, you’ll likely be paying a solid amount of tax on those dividends.

Franking credits take care of the tax for those shareholders on a tax rate of 30% or less.  But higher than this, and tax starts chipping into those dividends.

Clearly, you’ll need to deduct your own rate of tax from the gross yield, to see what you’d receive today – net of tax.

Of course, in retirement it’s a different story…

Most of us who are living less spendy lives, will naturally be on the lower tax brackets.  Unless of course, we choose to dial-up the income from new ventures we head into, after reaching Financial Independence.

Another thing I notice is, the more we have in Aussie shares, the more dividend income (and less growth) our portfolio produces.

 

Things To Remember

Everyone has a different opinion on diversification and what feels right for them, so I’ll provide no recommendation here.

Personally, if I was starting my journey today, I’d still want the bulk of my savings to be in Aussie shares.

Why?  Because it fits best with what I’m looking for as an early retirement income stream.

Ideally, here’s what we want:

  •  We want a relatively stable income stream in our local currency.  For us that’s Aussie Dollars.

This means I want to be earning dividends in my local currency, so my income doesn’t fluctuate with the movement of the Aussie Dollar.

  • We want an income stream which grows and keeps up with, or ideally, beats inflation.

Both Aussie and International shares should manage this comfortably, as they have over the very long term.

  • We want the investments to be simple to manage and relatively stress free.

For me, that means not having to rely on share prices to sustain retirement by selling shares to create income.

  • We want it to have a decent yield, so we don’t need millions and millions of dollars in savings to retire.

If we were going to use solely International shares, we’d need around $2 million to generate the dividends we need to live on.  And that would’ve meant an extra 5-10 years at work.  No thanks!

 

If I Started Today

Let’s pretend I was beginning my FI journey today.  What would I do?

Well, given my desire for freedom and slightly obsessive personality, I’d want to reach early retirement as soon as possible!

So, to do that I’d need to generate the highest (yet still growing) income stream, as fast as I could.  As long as it can keep up with inflation, the growth rate doesn’t matter too much.

Remember, reaching FI is all about your savings rate – investment returns are less important.  Because of our freakishly short time-frame, compounding doesn’t have time to make a huge difference.  This means, focusing on capital growth makes less sense to me.

And these points would lead me to Aussie shares.

But what about the tax?

Honestly, I wouldn’t mind paying extra tax in the short term.  Because after a decade of hardcore saving, those Aussie shares would be pumping out a juicy income stream, where the cashflow is either sheltered from tax, or it’s boosted higher by franking credits.

In other words, if you want to reach early retirement as fast as possible, yield matters.  It’s not everything.  But it does matter.

 

The Case for International Shares

As readers will know, I don’t invest in International shares for our own portfolio.

But later, this may change.  And the reason for that is, International shares adds diversification while reducing reliance on the Australian economy.

As we continue transitioning from property to shares – after we’ve built up our dividend income to cover our expenses, we’ll look at investing in International shares.

This will compliment our portfolio and reduce risk.  I don’t deem it totally necessary, but nice to have.

Basically, we’re making the assumption that Australia’s economy does just fine over the next few decades.  And the big basket of companies that is the Aussie sharemarket, are able to grow their dividends over time, as they have done for as long as we have record of.

Depending on what you think, you may consider this somewhere between extremely likely, and extremely unlikely.  Obviously, I’m banking on it being the first one.

Importantly though, we’re flexible people.  And we are willing to adjust to any new reality we find ourselves in.  It’s probably why we find ourselves holding very little insurance, for example.

 

Why We’re Not Buying International Shares…yet

It’s pretty simple really…

Let’s say your living expenses are $40k per year.  

Now, if you had $2m in savings – you could invest $1m into Aussie shares, and $1m into International shares.  According to our numbers above, your portfolio would have a gross yield of 4% – meaning $80k of annual dividend income.

But, let’s say you’re working with a smaller number, say $1m of savings.

With the same 50/50 allocation, this would generate around $40k in dividends.

Probably too close for comfort. 

But investing only in Aussie shares, would generate around $57k of gross dividends.

Now of course, there’s risks here.  There’s less diversification.  For some people, that’s a deal-breaker.  Others, not so much.  Also, there’s a chance that the franking credit system is changed.

While there is the odd chance that changes are made, the message of this article remains.  Axing refunds would simply mean a reduced income after reaching early retirement.  But the income from Aussie shares would still be much higher than most other assets.

 

Where Does That Leave Us?

Well, everyone needs to decide for themselves how much to allocate to International shares.  And whether they feel better for having the extra diversification (or not).

Also, we need to consider how it affects the overall dividends from our portfolio and how much we might need to save.

Obviously, if you win lotto, that $10 million is going to earn plenty of income for you almost anywhere.  Even in a stodgy old savings account, it’d pay over $200k per year in interest.

But for the rest of us, we need our savings to be a lot more effective at generating income.

Here’s one way to benefit from the growth of International shares without sacrificing dividends for early retirement:  simply switch the allocation in your Super fund.  You could even change it to 100% International shares!

That way, you can still benefit from the worlds largest and most profitable companies, which will be growing your Super nest egg for later on.

 

Final Thoughts

At the end of the day, I’m all about creating your freedom as soon as possible.

After all, this is an early retirement blog!  Not a steady-as-she-goes-take-your-time-retire-in-30-years-blog!

To me, this means it makes sense having a very large portion of our funds invested in Aussie shares, due to the far higher dividend income we can achieve.

Some people will consider that reckless.  Personally, I think it’s worth taking the (supposed) extra risk to get your life back sooner.

My thinking is, we should strive to build investment cashflow quickly, which allows us to venture off from the typical soul-draining workweek to find new adventures.

Once you reach early retirement, you’ll have a surprising amount of energy.  And you’ll end up earning money because you find things, or think of things, you want to work on.

So the point being, your investment portfolio doesn’t need to be a giant fortress, with assets in every corner of the world.

Also, the ability to realise how good we already have it, be flexible, and adapt to a changing environment (which the world is), is absolutely priceless.

If you can become that kind of person, your freedom will be earned many, many years sooner!

 

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46 comments

  1. Hi Dave

    Thank you for your well set out thoughts and I mostly agree with them. What would be your plan if you are a few decades into early retirement and the global stockmarket tanks for ten years, like it did in the 1930s depression? Do you feel that besides considering diversification between Aussie shares and international shares ETF that we should hold other assets for the above scenario?

    1. From Thornhill:
      “I also have the annual returns on the All Ords from 1900. There has never been a period of more than 2 years of consecutive negatives (dividends). If that’s the experience over 117 years I cannot understand the need for 5 years or more of cash to carry one through.”

      The most important thing in bad times is not to panic and don’t sell anything. Pretend your on a desert island and ignore the media. Cut back on spending when the worst hits and use the cash buffer as intended ie to top up any temporary shortfall in dividend income. A two to three year cash buffer will be able to smooth dividends for many years if need be.

      Not advice.

      1. Excellent non-advice from someone who has invested through scary times. Thanks Austing!

    2. Thanks Jon. It’s a good question.

      If we’re a few decades into early retirement I would probably assume that we’d earned at least a sliver of extra cash over that time and our balance would be higher than we started with. Our income should also be higher since dividends tend to grow faster than inflation, but living costs grow only at inflation, or for the frugal folks, slower than that.

      Most large crashes come straight after a massive boom with elevated profits and dividends, so we should have probably been saving some of those extra dividends during that time. Some cash as a buffer helps enormously, and the ability to be flexible with ones spending, or even willing to do a small amount of work will basically plug the gap I would think.

      If it’s an outright catastrophe, I’m not sure property would do that well either – it also collapsed during the depression in the US. Companies and individuals can’t pay rent if companies shut down and the economy is in the crapper. Over here, the Oz market actually didn’t suffer that much, I’d guess because our boom wasn’t as large. The only assets that may help would be stuff that pays no income and somewhat speculative like gold etc. You can see the yearly returns since 1900 here – interesting stuff.

      There’s no real way to know in advance what assets will hold up best. But importantly, life would go on and we’d still need businesses to function. Overall, holding cash as a backup and being personally flexible/adaptable is my personal approach.

  2. What are your thoughts on PMC for international exposure. Great yield 100% franked. Albeit it trades a lot higher to its NTA. Do we need diversification overseas, with the oz market generally following the world anyway?

    1. Hey Tony. I do like Platinum (PMC), but don’t own it. I don’t want to pay the premium lol.

      They’ve had excellent performance over 24 years since inception and they invest quite heavily in Asia, which compliments the International index fund (VGS), since it holds no Asian stocks.

      You’re right we do tend to follow the world markets and economies are more in sync with one another due to globalisation I believe. Some people think it’s unnecessary to invest globally, some think it’s a no-brainer – each person has to decide for themselves what feels right for them.

  3. I’m happy with Australian equities and to get my international exposure from holding a few LIC’s, ETF’s that give me exposure to overseas companies but at the same time give me decent dividends and franking credits.
    Its more about income for me as an early retiree rather than getting too fancy with stylish international growth stocks. If I wanted a individual stock that had overseas exposure I would rather hold MQG which earns 80% of its income overseas.
    Less risk, more income is my mantra……I’m taking Wilson’s up on their WAM global offer but thats about as extravagant as I’m going to get and I wont be sinking any real big dollars in that either till they start delivering regular income.

    That goose Bill Shorten will probably lighten our pockets by taking our franking credits as I expect him to win a close election which may cause a readjustment of many self funded retiree portfolios that have an equal weighting of equities vs cash, bonds etc. With bank interest rates low I would expect portfolios to shift to a even higher percentage of shares…we are at about 60/40, but I expect if Shorten takes my FC’s that will need to be adjusted to probably 80/20..
    Thats more risk and more income to generate and I reckon Aus equities are still my best investment…

    1. Thanks for the comment Mark!

      Effortless income all the way 🙂 I don’t mind ‘missing out’ on the exciting growth stocks here or overseas.

      I’m not into WAM’s new funds – they haven’t proven themselves investing in large caps or international. The competition in that space and their fees will make it too hard to deliver outperformance I feel. If they can do it over a long period I’ll be impressed, but that’s a long time away.

      Completely agree with your point. Even if franking refunds are taken away, Aussie shares are still hard to beat for income.

    1. Haha yeah he’s licking his lips at all the extra revenue he can raise from us poor retirees!

  4. Another quality article Dave.

    Love reading your stuff, I learn a lot!

    2 things I would like to raise that has not been covered in the article.

    1. Management fees (you know I’m obsessed lol). For the two ETFs you compared (VAS and VGS). The MER is 0.14% vs 0.18% respectively. On face value, the difference between the two seems minimal. But if we use your example of a portfolio of $1M. That works out to be a difference of $400 dollars between the two in management fees every single year. Compounded over a lifetime of let’s say 50 years @ 8% return (again using the values from the article), works out to be a quarter of a million dollars difference!!!

    This would further strengthen your decision to invest 100% in Australian shares… however!

    There exists an international ETF that covers roughly 40% of the globe which boasts an unbelievably low MER of 0.04%… VTS of course.

    I understand that it’s impossible to compare every single scenario when discussing these topics (believe me I know haha) but I thought that management fees should be a consideration in this discussion since they are known value that we can use in our calculations and not something we need a crystal ball for, such as future market returns.

    But with the new A200 from BetaShares coming in with a MER of 0.07%…it will be interesting.

    2. You bought franking into the equation. Where’s the love for the 50% CGT discount? I just finished reading Thornhill’s book. Great read. But even he states that capital gains is the more tax efficient way of receiving income. The issue is, of course, they aren’t as reliable and steady as the income stream created by dividends. But my point remains. All things being equal, capital gains provide the superior return vs dividends even factoring in franking.

    Keep up the A+ content dude!

    And yes the podcast is coming this month when I get off my ass haha. I’m working through a backlog

    1. Thanks a lot for the comment Firebug!

      That’s a fair point, I hadn’t considered fees at all. Haha yes you are a bit obsessed, but with good reason, it makes a huge difference over the long term as you said. But most of the reason Bogleheads (indexers) invest across the globe is for the sake of diversification – saving on fees is much less important from this angle.

      This point I kind of alluded to in the post – If I was going all-in on one country’s index it would definitely not be an overseas market, due to currency fluctuations. Since we’re investing for dividends, that income would fluctuate a fair bit and not be as reliable and steadily growing as with VAS/LICs. The Vanguard hedged versions seem to hedge the value, but the distributions are all over the place, which makes it even worse for those just wanting to collect income.

      I included franking, but didn’t bring the CGT into it, because this post is about how it affects dividend investors 😉
      Haha we’re now back to the income vs capital gains debate. Everyone has to make their own choice here. I’d never say capital gain harvesting is wrong, it’s just different. Sure it might be more efficient, but it’s just not the way I want to invest. In my mind, it doesn’t provide a stress free growing income stream. I don’t want to have to fiddle with things and sell, or rebalance, or look at share prices – I just want to sit back and watch the dividends coming in 🙂

      In retirement, due to Aussie tax brackets and franking, it means we can receive a fairly hefty flow of income and either have all the franking refunded, or not pay any additional tax up to 135k of income. For a couple, 40k of gross dividends means franking entirely refunded, and 5.7% net yield. Or on the higher end, 95k fully franked dividends means 135k gross income, and tax payable is 40k, meaning 95k clear after tax. For a couple you can double it. So that’s 190k of net dividends after tax, meaning a couple still takes home their 4% net dividend. Franking covers the tax entirely. That’s a pretty sweet deal and a hassle free income, even if retiring with a large net worth. The tax burden of dividend investing is overblown in my view – here in Australia anyway.

      Thanks for the great points raised mate. Haha no dramas on the podcast, hope it comes out alright!

    2. Capital Gains, Labor if elected will halve the current CGT Discount on new investments so subsequent to that CGT would apply to 75% of the gain as opposed to only 50% now.

      Franking credits are still very valuable even if refunding was abolished.

  5. Some great stuff to think about Dave! I may even run some numbers to see which strategy is most beneficial considering how long I expect to be at different tax brackets!

    It would be cool to draw some graphs showing as much as well.

    Just popped by to say keep up the quality content.

    1. Thanks a lot Pat!

      Would be very interesting – I’ve got that on my to-do list actually. There’s probably no perfect answer though, since everyone will have a different amount in mind for International.

  6. Yet another great article – I like learning new things. Had a chuckle at the stir this article caused on Reddit – LOL!
    Also, did I see you write a piece for Motley Fool recently, or was I just imagining things?

    1. Cheers Phil 🙂

      Haha yeah there were a few upset people over there, what a terrifying thought – somebody investing differently to themselves.

      And yes that may have been me…very well spotted mate!

      1. In fact, I now have your profile at Motley book marked so that each time you write an article I get to see it. It’s a bonus reading your thoughts both there and here. It is great to have a undercover Thornhill/Dividend investor writing for Motley 🙂

        1. Haha that’s nice of you Phil. Those should probably be taken with a grain of salt though 😉
          I think more passive investing (LICs/index funds) is the best choice for almost everyone (myself included). But I do have a soft spot for dividend stocks which is hard to give up!

  7. I actually don’t mind a smaller initial dividend from the international exposure – I’m hoping the dividend growth aspect helps out over time.
    I think if I was closer to retiring it would be a different question, but I’ve got a long investing road ahead!

    1. ADI, you’re spot on – the higher dividend growth should make up for it over the very long term.
      At the end of the day it mostly comes down to people’s time-frames and preferences.

      Thanks for stopping by!

  8. the fact that Berkshire Hathaway, run by the world’s greatest ever value investor Warren Buffet,
    has never paid dividends, should make you think again that dividends are the be all and end all of investing, even in retirement. The capital growth of the S&P500 index over the past decade has beaten the pants off the ASX200 including its dividends.
    there DEFINITELY should be a place in people’s portfolios for global equities.
    https://rogermontgomery.com/amp-demonstrates-capital-concern-for-income-investors/

    1. Sure it’s easy to say that Carlos. If every company could compound money like Buffett then yes. But there’s only ONE Warren Buffett and Berkshire Hathaway so it’s not that simple. An interesting take on Berkshire vs LICs can be found here over the last 20 years. https://cuffelinks.com.au/lics-vs-berkshire-imputation/
      It’s just an example, not saying they’re a better investment than Berkshire. Just saying it’s not as bad as you think it is.

      Companies need capital to grow, yes, but they also tend to waste a lot if they have no spending limit, which is effectively what they’re given without a dividend policy.

      Thanks for sharing your opinion, everyone needs to decide what’s best for them.

      You’re right the last 10 years US has smashed Oz…but you know what happened before that, Oz smashed the US. These things tend to go in cycles of over and under-performance. Both markets have actually produced the same return after inflation for the last 120 years, as I linked to in the article. Here again: https://cuffelinks.com.au/us-shares-new-highs-australia/

      Sorry but Roger’s argument is ridiculous. He’s saying the investment has gone down so the investor can’t cash out and use the money for other things. The investor shouldn’t have any money in the market in the first place, even on the odd chance he wants to use it. Capital losses happens with all shares, not just dividend-payers. AMP has gone down because of fraudulent activity, not because they pay dividends. Any investor is burned if a company is being fraudulent, whether they bought it for income or not. What a load of rubbish!

        1. Haha yes it’s interesting. I’ve been thinking about this more recently.

          My view is, Buffett invests wholeheartedly for growing earnings/cashflow – even if it means paying tax. I don’t believe he follows the ‘capital growth’ mantra that people push when using him as an example of compounding. He wants compounding cashflow – the capital growth is just a result of that.

  9. Nice article Dave – and not just because I agree with your approach 100% on the Australian shares!

    It’s all about finding a strategy that satisfies your own personal goals, not what is ‘theoretically’ ideal. If you’re looking for a good income stream, and trying to grow it, then Aussie shares are just fine. No-one has a clue which markets will ‘grow’ better in the next 10 or 20 years anyway.

    Look forward to looking back in 10 years time and seeing that we’ve both achieved our own goals with an Aussie portfolio and its fully-franked dividends!

    Cheers, Frankie

    1. Thanks Frankie!

      Couldn’t agree more. Theory is well and good but we also need a strategy we can stick to from a behavioural sense as well – a strategy we feel comfortable with and can stick to. For me, that’s where the dividend focus gives a psychological edge. And being that we mostly lose money investing because of our own behaviour, I think this is important.

      Looking forward to that too mate mate, hopefully we get some decent dividend growth over that time 🙂

  10. very nice article and i would have followed all that if i was 100% sure to stay in australia for FIRE
    in any case, as long as you invest and wisely we should all coming happy in theory in the long run!

    1. Glad you enjoyed it grogounet.

      Thanks for bringing up a good point – for Aussies wanting to retire in another country, this makes less sense.

  11. Hi
    I just came across your articles. Very instructive and a great writing style.
    I retired 2003 age 56, put 70% of my super into MLT,ARG,AFI, and about 10% into the big 4 banks and rest spread around
    So far its working and I live very well off dividends plus franking credits
    I would really appreciate any thoughts you have about what to do about Shortens FC grab, it will mean I have to spend capital and I try to avoid that.
    If you have a minute please let me know

    1. Hi Mike, congratulations on your long and comfortable retirement!

      Yeah there’s no way to sugar coat it, it’ll suck for those who rely on getting franking credits refunded. I’m not really sure there’s an easy solution to find a higher yield than Aussie shares to live on. I suppose if you feel comfortable picking stocks you could choose a few property trusts, but be careful.

      The only other high yield place to park some cash that I do personally is peer-to-peer lending. I have an article about it here – bear in mind the high-yield choices such as 5 year lending means the money is locked up and slowly paid back to you. Also it’s flat interest payments so the income won’t get larger unless you reinvest some. I quite like it for a small portion of our portfolio, since the 3-5 year rates of 7-9% per annum is quite attractive in my view. Have a look and see what you think.

  12. Hi
    I just made a comment first time,
    I hope my name doesnt appear in full
    Plus
    I tried to subscribe but your system wont accept my email address
    Can you fix that please and remove my last name
    Thanks
    Mike

    1. Just fixed up the name thing Mike, all good.

      And your email address is definitely on my subscribers list so you should receive new blog posts! Any issues, please let me know.

  13. Hi,

    Thank you for your article, you’ve prompted me to think more carefully about investing in international shares. Not to discount it, but certainly to research any investment overseas with greater rigour.

    Highly recommend a documentary from 2017 called “The China Hustle,” if you haven’t seen it already. It explores Chinese companies listed on the US stock exchange through reverse mergers, and the (alleged) fraud that was revealed.

    People would believe in the underlying profitability of these companies because they were listed in the US market. But the underlying entities for these US companies were actually based offshore, and riddled with fraudulent numbers. There seemed little recourse for investors – both retail and managed funds – to recover their losses. Short sellers profited handsomely. The saddest part was probably the interview with retail investors who had lost considerable savings.

    The take away message for me was the importance of due diligence. Personally, I’d prefer to invest in a market that I can have some means to try and understand. Aussie share market for me, for now.

    Cheers

    1. Thanks V.

      I’ve heard about that movie but haven’t seen it. Certainly an interesting story, and sad. To me it doesn’t mean avoid international shares, it would just mean it’s much safer not taking bets on individual companies and to invest in a large basket through an index fund.

      The index is self-cleansing in that as a company falls out of the top 300/500/whatever it’s always replaced by another company. Hence you never end up holding a bunch of losing, irrelevant companies in the future.

      Cheers for your comment 🙂

  14. Hey,

    Forgetting all the arguments about whether international is needed for balance etc. I have been trying to tease my way through the Vanguard international products to see what they actually include. Again, separate to the issues of MER, estate tax etc.

    Traditionally people using index investing for international exposure would go VTS/VEU. VGS is obviously a newer product with slightly higher MER, but Aussie domiciled. VGS however only includes US and established markets. It does not replicate the breadth of exposure as VTS/VEU.

    What are your thought on say adding in VGE (emerging markets) to VGS. Again higher MER, possibly more risk.
    Or adding VEU – but i think this would have substantial overlap.

    It is hard to get the actual investment breakdown from the website to do a thorough comparison.
    Have you had any success in doing this?

    Thanks

    1. Good question SJ – it’s an interesting one and there’s probably no right answer. What each person prefers will come down to simplicity vs diversification etc.

      VEU wouldn’t make sense I don’t think as this is mostly replicated in VGS. VGS is essentially mid and large developed markets – no emerging markets or small caps. That in itself is still a pretty good diversifier. VGE would make more sense but then it’s an extra holding = less simple.

      There’s also the theory/case that Australia is kinda like an emerging market because we’re so small and mainly that we’re heavily reliant on emerging markets like China etc. So adding more emerging market exposure to your portfolio increases that reliance further. A case could be made either way really, so it’s up to you to decide.

      Again probably no right answer, for the ones who want the most diversification will go for VTS/VEU, but those that would rather keep it simple will likely just add some VGS and be done with it.

  15. Hi Dave, forgive me if you have answered these questions already (please just direct me to that topic if you have), but as its looking more and more likely a Shorten government will be in power next year, and given their policy on franking credits:
    – Will you not be quite affected by the proposed changes? I noticed in another topic you stated Australians can earn up to $20,500 tax free, and then because you are paying no tax you added the franking credits on top of the $20,500. Will the changes potentially see you and your partner lose up to 30% each of the income you were assuming in your return from your predominately LIC driven portfolio?
    – How are the potential franking credit changes going to affect the LICs themselves? I have tried to find a summary explaining this on the internet but cant really find anything. As i understand, LICs are able to currently accumulate their franking credits they receive from their investments for a ‘rainy day’ to smooth out their own dividend payments to shareholders. Will the proposed changes reduce this ability?

    1. I haven’t written specifically about it yet, I will if it comes through.

      Yes, all Aussie share investors will be hit by this, us especially. You’re correct the franking refunds will mean a loss of income, being that most of our income is from Australian LICs/shares. At the end of the day, we’ll still be receiving approx. 4%-4.5% dividend stream which will be tax free up to 95k for an individual – we just won’t get franking credits refunded to boost this further. This dividend stream is still pretty good, and hard to match in a diversified way.

      The LICs may fall out of favour if it comes through due to their fully franked dividends, so share prices may take a small hit. This means they may then regularly trade at a discount which compensates the investor somewhat, being able to accumulate cheaper with a higher yield. It doesn’t affect their ability to smooth dividends. In fact, it doesn’t affect anyone except those receiving franked dividends in a tax bracket under 30%. Franking will still be there to offset tax on any income, just no refunds are proposed.

      Does my strategy change under this scenario? No, not really. I may add VAS to the portfolio since the index pays no tax before it passes on the dividends, where the LICs do pay a little tax, meaning it’d then be slightly more efficient for low tax bracket people to earn dividends through an index fund, but as mentioned the LICs may trade at a discount making up for it. Either way, still investing with an Oz focus, for an increasing dividend stream. Will write about it in the rare event that our pollies can agree on something and it actually gets through 😉

  16. I noticed that Blackrock/iShares are going to move various ETFs to being Australian domiciled, including IVV.
    Does this changes anything for you if looking for US exposure?
    Surely filling in a form every 3 years isn’t a big burden. Possibly the estate tax issue but in reality how big a problem is this?

    Do you think there is a meaningful difference in iShares IVV (S&P 500 index) vs Vanguard’s VTS (total market) which will remain US domiciled. Both have extremely low MERs.

    1. Good question. It definitely makes those ETFs more attractive for someone wanting US exposure. No meaningful difference – I’d be happy to go with IVV or VTS. VTS offers more diversification, but there’s the tax issue. In reality it could take a chunk of someone’s estate when they pass away so I don’t think it’s something to ignore.

      For international I’d be more likely to go with VGS (international developed markets). Not just because it’s domiciled in Australia, but because it has exposure to every developed market rather than just the US. This makes more sense to me when I eventually want to invest outside Australia. Why would I then go and pick out a single overseas country like the US to invest in?

      I know it’s the biggest market with some global powerhouse companies, but whether that continues forever is another thing. It’s only in the last 30-50 years or so the US has become so dominant. Maybe over the next few decades other markets become more dominant? The single reason I’d invest outside Australia is for diversification between economies/companies/countries, so it would then make sense to have an investment like VGS – where money is spread across other developed markets, not just the US.

  17. Yeah I agree.

    I have gone with VGS for my first overseas purchase and agree its a great staring point- diversified with still low MER and Aussie domiciled. Only weakness is lack of emerging markets/economies. No Asia I think?

    The US is surely still going to offer something going forward – especially with the large global tech stocks dominating their market. I think if you wanted to weigh heavier than the ~60% US weighting of VGS this now adds a cost effective way that is now locally domiciled.

    1. No Asia except Japan. I’ve seen a view that because Australia is already heavily reliant/exposed to Asia, then emerging markets are less important. That makes sense, but China does have some outstanding and growing tech companies which rival the likes of Amazon, Facebook etc – so I can see the appeal in owning emerging markets.

      Yep good summary 🙂

    1. Not at this stage as I don’t invest really follow those personally, though I do occasionally look at Platinum’s newsletters. I could write about them but the more LICs I cover, the more overwhelming this stuff might seem – very much looking to avoid that.

  18. Wotcha everyone , as they used to say .

    Back to tight wadding ; its the management fees that kill the golden goose for dividend hunters big and small ; for example , Wam Capital and its off-shoots , amongst many others , charge 1 % Mer AND a 25 % Performance Fee in a bullish market ! Hence the popularity of the ETFs generally .

    l myself am trying to sort out the ” best ” stock from within each of the eleven sectors , thus eleven stocks total [ in order to keep trading expenses as low as possible ] in a given portfolio in Oz .
    The best plan would be [ statistically , that is ] to use an equal-weighted allocation and trade only half of the value of any given one at any one time , which might then prove to be the ” safest ” route to take given the vagaries of the times .
    Incidentally , 80 % of fund managers do NOT beat their own chosen index or indices ; why pay more when one could well be one’s own portfolio manager ?
    Thank you , Dave , for the update on WHF .

    Happy investing , Ramon .

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