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ASX vs International ETFs: Which Should You Choose?

•By Best ETFs Australia•5 min read•ETF Comparison

ASX vs International ETFs: Which Should You Choose?

One of the most important decisions for Australian investors is how to allocate between Australian and international ETFs. Should you focus on the ASX, invest globally, or do both? This article explores the key considerations to help you make an informed decision.

Understanding the Options

Australian ETFs (ASX-focused)

These ETFs track Australian indices like:

  • S&P/ASX 200 Index
  • S&P/ASX 300 Index
  • Other Australian market indices

Examples: VAS, IOZ, A200

International ETFs

These ETFs provide exposure to markets outside Australia:

  • US markets (S&P 500, NASDAQ)
  • Developed markets (MSCI World ex-Australia)
  • Emerging markets
  • Regional markets (Asia, Europe)

Examples: IVV, VGS, VTS, NDQ

The Case for Australian ETFs

Advantages

1. Home Country Benefits

  • Franking Credits: Australian companies pay dividends with franking credits, providing tax advantages
  • Familiarity: You understand the companies and economy
  • Currency: No currency risk (investments in AUD)
  • Regulatory Environment: Familiar rules and protections

2. Sector Strengths

  • Strong financial sector (big four banks)
  • Resource sector (mining, energy)
  • Healthcare and technology growing
  • Real estate investment trusts (REITs)

3. Dividend Yield

  • Australian market typically offers higher dividend yields
  • Regular income from distributions
  • Franking credits enhance after-tax returns

4. Lower Costs

  • Australian ETFs often have lower management fees
  • No currency conversion costs
  • Simpler tax reporting

Disadvantages

1. Limited Diversification

  • Australian market represents <2% of global market cap
  • Heavy concentration in financials and materials
  • Limited technology exposure
  • Small number of large companies dominate

2. Home Country Bias

  • Over-reliance on Australian economy
  • Vulnerable to local economic conditions
  • Miss global growth opportunities

3. Sector Concentration

  • Financials: ~30% of ASX 200
  • Materials: ~20% of ASX 200
  • Limited exposure to technology, healthcare innovation

The Case for International ETFs

Advantages

1. Global Diversification

  • Access to world's largest economies
  • Exposure to thousands of companies
  • Reduced country-specific risk
  • Access to global growth trends

2. Sector Opportunities

  • Technology: US tech giants (Apple, Microsoft, Google)
  • Healthcare: Global pharmaceutical companies
  • Innovation: Access to cutting-edge companies
  • Consumer brands: Global market leaders

3. Market Size

  • US market alone is ~60% of global market cap
  • More investment opportunities
  • Greater liquidity
  • More specialized ETFs available

4. Growth Potential

  • Emerging markets offer higher growth potential
  • Access to faster-growing economies
  • Technology and innovation hubs

Disadvantages

1. Currency Risk

  • AUD fluctuations affect returns
  • Currency can amplify or dampen returns
  • Requires understanding of currency movements

2. Tax Complexity

  • Foreign tax withholding
  • More complex tax reporting
  • Potential double taxation (mitigated by foreign tax credits)

3. Higher Costs

  • Slightly higher management fees
  • Currency conversion considerations
  • More complex investment structure

4. Less Familiar

  • Unfamiliar companies and markets
  • Different regulatory environments
  • Less intuitive understanding

The Balanced Approach

Most financial advisors recommend a balanced allocation between Australian and international ETFs.

Conservative (More Australian)

  • 60% Australian ETFs
  • 40% International ETFs

Balanced (Equal Weight)

  • 50% Australian ETFs
  • 50% International ETFs

Growth-Oriented (More International)

  • 40% Australian ETFs
  • 60% International ETFs

Why Balance?

  1. Risk Reduction: Geographic diversification reduces country-specific risk
  2. Opportunity Capture: Access both Australian and global opportunities
  3. Tax Optimization: Benefit from franking credits while gaining global exposure
  4. Sector Balance: Combine Australian financials/resources with global technology

Real-World Portfolio Examples

Example 1: Simple Balanced Portfolio

  • 50% VAS - Australian Shares
  • 50% VGS - International Developed Markets

Total Cost: ~0.14% per annum Diversification: Broad Australian + Global developed markets

Example 2: Three-Way Split

  • 40% VAS - Australian Shares
  • 40% IVV - US S&P 500
  • 20% VEU - Emerging Markets

Total Cost: ~0.10% per annum Diversification: Australian + US + Emerging markets

Example 3: All-in-One Solution

  • 100% VDHG - Diversified High Growth

Total Cost: 0.27% per annum Diversification: Pre-allocated mix of Australian, international, bonds, and property

Factors to Consider

Your Investment Goals

  • Income Focus: May favor Australian ETFs (higher dividends, franking credits)
  • Growth Focus: May favor international ETFs (more growth opportunities)
  • Balanced: Mix of both

Your Time Horizon

  • Long-term (10+ years): Can tolerate more international exposure
  • Short-term: May prefer Australian (less currency risk)

Your Risk Tolerance

  • Conservative: Higher Australian allocation
  • Aggressive: Higher international allocation

Tax Situation

  • High tax bracket: Benefit more from franking credits (Australian)
  • Lower tax bracket: International may be more attractive

Common Mistakes

1. Too Much Home Bias

Many Australian investors have 80%+ in Australian assets. Consider reducing to 40-60%.

2. Ignoring Currency Risk

Understand that international investments are affected by AUD/USD movements.

3. Chasing Performance

Don't switch allocations based on recent performance. Stick to your strategy.

4. Overcomplicating

You don't need 10+ ETFs. 2-4 well-chosen ETFs can provide excellent diversification.

Conclusion

The choice between Australian and international ETFs isn't either/or - it's about finding the right balance for your situation.

Key Takeaways:

  • Australian ETFs offer tax benefits (franking credits) and familiarity
  • International ETFs provide global diversification and growth opportunities
  • Most investors benefit from a balanced approach (40-60% Australian, 40-60% international)
  • Consider your goals, time horizon, and risk tolerance
  • Start simple and adjust as you learn

A well-diversified portfolio typically includes both Australian and international exposure. The exact allocation depends on your individual circumstances, but avoiding extreme home bias (too much Australian) or complete international exposure (too little Australian) is generally wise.

Remember, diversification is about reducing risk while maintaining growth potential. By combining Australian and international ETFs, you can achieve this balance while benefiting from the strengths of both markets.

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