Introduction to Exchange Traded Funds: International ETFs

International ETFs, as the name implies, allows the investor exposure to global sharemarkets. There are several reasons why investors buy international ETFs. First, the Australian market represents only a tiny chunk of the entire world's market capitalisation. Investing in international ETFs means exposure to the big kahunas of the overseas market like Berkshire Hathaway and Microsoft.

Investing in international ETFs is also much simpler than investing in individual overseas stocks. You buy these ETFs using foreign currency and you receive distributions also in foreign currency.

What indices do international ETFs track? Examples are indices by country (US S&P 500 index), region (S&P Asia 50), multiple countries (S&P Global 100 index) and international sectors (S&P Global Healthcare Index).

The same procedure applies when buying international ETFs. Like domestic ETFs, you buy international ETFs through a broker. Settlement date is also T+ 3, three business days after the transaction. Large financial institutions in the US usually issue international ETFs, which is cost-effective for them.

CDI vs ETF

Note that you do no actually hold the international ETF, which is listed in the US. What you hold is a CHESS Depositary Interest (CDI) which is an ASX-listed security that mirrors the US-listed ETF. You may ask why not just list the ETFs on the ASX?

The reason behind this is that international ETFs are governed by a different set of laws, which do not recognise the CHESS settlement system for securities. CDIs make it possible to transfer foreign security holdings, as CDIs are listed on the ASX.

Even though investors hold the CDI equivalent of the international ETF, they still get full economic benefits such as bonus issues and dividends. Do not let CDIs confuse you. In practice, there is small difference between holding a CDI and holding the actual international ETF.

Returns

Like domestic ETFs, returns on international ETFs come in the form of capital growth and income from regular distributions. Returns are not only affected by index performance, but the movements of the Australian dollar against the currency of the index.

Distributions are usually paid in cash in your chosen Australian bank account. Note that most international ETFs do not have dividend reinvestment plan (DRP).

Risks

It's important to understand currency risk when trading international ETFs. For example, you hold a Vanguard US Total Market ETF. The rise in value of the Australian currency will work against you. If the AUD (Australian Dollar) strengthens against the USD, the value of your ETF falls.