ETFs are leaving Aussie shares behind

Australian shares have returned less than 1% over the past year while the US market climbed 22%, and ETFs have made it easier than ever to stop missing out.

Are you one of those old-fashioned Australian investors who is still holding a portfolio of great big Australian blue-chip stocks? Well, let me tell you – that has cost you a fortune. Here’s the harsh truth. Over the last year, the Australian market has returned less than 1% whilst the US market has returned 22%. And over the last 20 years, the Australian market has produced a compound return of less than 3% whilst the US market has returned 9 to 10%. So this is the question: is it time to bail on the Australian market and Australian stocks? Are you leaving thousands of dollars on the table by sticking with what you’ve done since the 1980s? You almost certainly are. I’m going to tell you how easy it is to change your fortunes, to lift your gaze to the horizon, and to make thousands of dollars doing something different to what many Australian retiree investors have been doing for the last 20 to 50 years. Let’s get to it.

The resources boom that flattered Australian shares

Okay, this is a chart of the Australian ASX 200 index against the S&P 500 index over the last 20-plus years. And what you’ll see is the Australian market has relentlessly underperformed the US market. In fact, the only time the Australian market has consistently outperformed the US market was during one of those really rare events – the resources boom from 2000 to 2007. You remember that? That’s when China was building Brisbane every three months and just could not get enough of our iron ore and coal. The Australian economy was booming. The government at the time was earning so much money it could do no wrong. The prime minister and the chancellor were hailed as heroes because they had so much money to hand out. And it was because of one thing: China and a resources boom.

The interesting thing you need to know about Australia is that if we do ever get a resources boom again, you need to get back into Australia. In a resources boom, the Australian dollar – which is a commodity-based currency because our economy is a commodity-based economy – will boom. If you remember, it went to $1.10 against the US dollar, and that is an enormous attraction for international investors. So international investors during a resources boom were getting what is called a double bubble, which means that not only are share prices of commodity stocks going up – BHP Group (ASX: BHP), Rio Tinto (ASX: RIO), everything else in the resources sector, which is 25% of our market – but the whole world wanted to invest in commodities, and whilst it was doing so, the Australian dollar was going up. Which means that any international investor is not only getting a share price rise in BHP and Rio, but it’s also getting a currency benefit. So US investors and international investors made a fortune. During this time, the share price of our stocks was getting overinflated because of our currency as well.

So come the next resources boom, Australia is the best place to be. But outside of that, it is probably the worst place to be. And unless you see a resources boom coming again, you really need to look beyond Australia for returns.

Why Australian shares can’t match US growth

You may not know this, but US investors see the stock market as a growth investment, not an income investment. They look to the bond market if they’re looking for income. We happen to have a bank sector that pays a lot of income, so we seem to think our market’s about earning income, but it’s not – the equity market is about taking risk to make money. It’s about growth. And you’re not going to get growth stocks in Australia without a resources boom. If the resources aren’t flying, then banks are mature, low-growth stocks, and then you’ve got a bunch of desperate industrials to invest in. Outside of that, you need to be looking for some other way to make money.

The ETF shortcut to global markets

And the most obvious way is the way everybody’s been doing it for the last 20-plus years, which is investing outside Australia. And the amazing thing for you is that it has become tremendously easy because of the exchange-traded fund market, which has developed globally and in particular in Australia. We now have over 400 exchange-traded funds in Australia which allow you to invest outside of Australia on the same platform that you would click and buy Commonwealth Bank (ASX: CBA). You can now click and buy the S&P 500, the NASDAQ, any US sector pretty much is now represented by exchange-traded funds, and that’s where you’re going to get your returns.

The other thing that has been going on relentlessly in the background, which is very important for an Australian investor to factor in, is that because of exchange-traded funds investing in US stocks, if those stocks go up and the Australian dollar goes down, you’re doing what all the international investors did in Australia during the resources boom – you’re getting double bubble. And the reality is that with the Chinese economy going nowhere, the Aussie dollar is relentlessly deteriorating against other currencies, and it won’t recover until there is another commodity boom. Which is fine for an Australian investor if you never want to go on holiday in Europe or the US or overseas, and it’s fine if you never want to buy a Mercedes or a European car, which is going up in price because the Aussie dollar is going down. You are isolating yourself in Australia if you don’t take advantage of international currency strength and international stock markets.

So this is not really a problem for most Australians if you want to stick in the banks, earn your dividends, and you’re happy with that – that’s absolutely fine. But the opportunity is here for you to take advantage of growth stories that don’t exist in Australia. The most obvious one is the technology boom, which has been running for many years and has caused the US market to significantly outperform our market.

The performance gap by the numbers

Over the last 20 years, the S&P 500 is up 502%. The ASX 200 is up 76%. That’s without dividends – we’d be a little bit more competitive if you included them. Over the last 10 years, the S&P 500 is up 253%, the ASX 200 is up 66%. Over the last five years, the S&P 500 is up 75%, the ASX 200 is up 19%. And as I say, over the last year the ASX 200 is up less than 1% whilst the US market is up 22%. And that’s just looking at the S&P 500, not the NASDAQ. Obviously we all know there has been a great growth story in technology stocks – AI, data centre buildouts – and we’ve got thematics coming up like robotics which will change the world. None of this is going to be available to you if you continue to go eyes-down, navel-gazing on rather boring Australian blue-chip stocks that may be paying you a decent dividend, but they lack growth.

So, a simple solution: think outside the square. If you’re sitting there with 20 Australian stocks, you’re missing a huge opportunity to take advantage now, through the exchange-traded fund market, of growth options in almost any country in the world, and particularly in the US and Europe. So lift your gaze, consider investing outside Australia, consider making money in another currency rather than a rather dull Australian dollar which won’t go anywhere without a commodity boom. The world is your oyster.

If you want to know more about exchange-traded funds and how to invest outside Australia, sign up for a free 14-day trial of Marcus Today – we cover ETFs and global markets in our Education Hub every day. And if you’d rather we do the investing for you, MT20 invests only in exchange-traded funds and has outperformed the ASX 200, the ASX 200 accumulation index and the S&P 500 since launch, with $170 million under management including my own super.