Indians can choose to invest in the US markets directly as a vehicle to diversify globally. This is an often ignored & less-explored option compared to investing in international funds domiciled in India. I cover the key benefits of this route for Indian investors in this post while in the next one, I will cover other aspects like taxation, trading costs, etc.
There are three key benefits of investing directly through US markets for achieving global diversification of assets.
- Pedigree – The US markets allow access to the major global funds as well as many of the global blue-chip companies.
- Range – Given the scale and depth of the US markets, they can act as a one-stop-shop to diversify both globally and across asset classes (e.g. including real estate, commodities, etc.).
- Fees – The US markets are amongst the most competitive and have seen the downward trend for fees for many years now hugely benefiting investors.
As of 2018, the US accounts for 45% of the global 46.7 trillion USD industry size of open market funds. The Indian market in comparison while growing rapidly, still only has ~350 bn USD in assets.
The chart below gives a list of the largest asset management companies worldwide as of March 2019 with assets in trillion USD and the US market allows access to all of them: basically you get to choose from all the global majors just by investing in the US market.
You can also look at the list of top 65 AMCs by size globally here; the dominance of US-headquartered AMCs is quite obvious.
The pedigree advantage accrues when investing in stocks directly also; a list of top 100 companies by market cap, indicates that the US accounts for 64% of the companies by market cap and 54% by count. The table below indicates that 10 of the top 13 names belong to the US.
You can finally own a piece of Google, Microsoft, Apple, and Amazon if that is what you have been craving for!
The categorization used by Morningstar gives an idea of the various asset types that are available for investing. The US markets allow both geographical diversification as well as spreading risks across asset classes. It also allows the investor to tap into the latest innovations in the financial markets.
Another key advantage of investing through US markets is that the market is very competitive in terms of fees (i.e. expense ratios) and is seeing an inexorable lowering of fees year on year driven by competitive pressures. As this graph shows, fees for active equity funds, active bond funds, and ETF funds are now in the 0.76%, 0.55% & the 0.16%-0.2% range currently and are consistently trending down.
This trend mirrors what we have seen with brokerage fees in the US market recently where ETFs and stocks can now be invested in with zero broker fees.
One area where benefits linked to pedigree, variety, and fees all come together are ETFs.
The US accounts for 71% of the 4.7 trillion USD in ETF assets around the world & the ETF market in the US has evolved heavily in the last few years (1988 ETFs in 2018).
Sample the list of top 10 ETFs in the US by AUM. While size does not necessarily determine whether an ETF is the best, they can often be the good bet – the spread while transacting will usually be lower, will usually have lower fees and a longer track record.
Vanguard and iShares (Blackrock) are both good pedigree names not available in India.
You can see the variety available just within the top 10 ETFs: S&P 500, entire US stock market, Nasdaq 100, emerging markets, US bond market, developed markets ex-USA.
Further, in the list above, except for EFA, all the other ETFs have fees practically lower than 0.1%. This compares favorably against the majority of the India based international funds which carry high expense ratios (the average easily being 1% even for direct plans with some of them being even higher than 2%).
You can look at the top 100 ETFs by AUM here; as you can see the variety of options is humongous and gives you options across asset classes and geographical markets besides allowing you to play on factors (like momentum, value, size, dividend yield, etc.) while investing.
Investing globally through the US markets offer additional advantages in terms of the top pedigree of asset management companies, an almost unlimited variety of options to diversify both geographically and across asset classes and finally the most competitive fees across the globe which is a factor in stark contrast to the generally high fee charged by international funds based in India.
However, this route also involves additional complexities in terms of tax compliance & transactional costs. I will look at these and other aspects in the next part of this blog series.
Global diversification series
This blog post is the third part of a series on global diversification for Indian investors. You can read the first two parts of this series through the links below.
Disclaimer: The above facts are basis my own research around the beginning of Nov 2019. If there are any errors, please do point them out in the comments below and I will happy to correct them.