International Nasdaq-100 vs S&P500 vs All Ords

After hearing some of the views of Hamish Douglass from Magellan as posted in separate thread see below

This is the future, according to Hamish Douglass (CIO Magellan)

I started doing bit more research about US indexes and although I heard about the Nasdaq 100 index previously never took it seriously thinking it's not diversified and always best to invest in S&P500 or Total US stock market index fund. But after looking at 32 year history (Price Only from 1985) and comparing it with S&P500 and All Ords I was very surprised to see the results. See the graph below:



Nasdaq 100 index has increased at 13% average compounded growth over past 32 years.

I should highlight the fact that Nasdaq100 pays only about 0.5%-1% dividend compared to other indexes which pay much higher dividends. Secondly, Nasdaq100 is not as diversified with technology sector making up 62% of the index with top 5 companies Apple (12%), Google (9%), Microsoft (8%), Amazon (7%) and Facebook (5%) making up 41% of the index.

But as each day passes their platforms are getting bigger and stronger and they have their core markets in which they are leaders globally. Each of these companies are very profitable with exception of Amazon, increasing their revenues at a very healthy rate, have very high returns on equity and they are pouring ridiculous amounts of money in R&D to stay market leaders and innovate at the same time.

What I want to highlight though is the future of none of the above companies is in threat (right now). Anyone who wants to invest for long term capital growth Nasdaq 100 index provides a good option. I intend to invest small portion of my portfolio in it to compliment my index/lic porfolio. The good news is there is an Australian domicilied ETF for Nasdaq 100 index offered by Betashares (ASX: NDQ). Although, the fees are 0.48% which is not cheap but acceptable.

I am fully aware of crash in Nasdaq index in early 2000 during the dot-com crash. I know it can be a very volatile/risky index due to higher concentration but so can ASX200 if our bank's business model ever gets threatened by technology disruption.

Cheers,
Oracle.

 

Seems like over kill to me but each to their own.

Like @Il Falco said there's a lot to like about what Hamish is preaching. But he's also talking his own book. His last thought bubble not all that long ago was a bit of a flop. These thought bubbles usually coincide with the release of new Magellan product or when he wants to boost interest when performance is lagging.

A simple index solution including developed and emerging markets I would have thought was broad enough International equity coverage.

 

Yes, I agree. But my suggestions were more towards core portfolio of index (local/international) etfs and satellite portfolio including local LICs and ETFs like Nasdaq 100.

The main issue is the best Australian domicile unhedged ETF you can get for US market exposure is VGS. Which has about 60% US. So if you want higher exposure you need to go US domicile ETFs.

Nasdaq 100 ETF is the only other Australian domicile ETF that you can use that will let you increase the US exposure. The other benefit is higher growth and lower dividend which can be handy if you are in accumulation phase and fall in higher tax bracket which I do.

I have looked at all 100 stocks in Nasdaq 100 and I feel fairly happy with what’s on offer. To be honest if you asked me 20-25 years from now out of top 100 ASX200 stocks how many will still be existing and be more profitable compared to current Nasdaq 100 stocks I would feel more confident with stocks in Nasdaq 100.

But this is just my opinion and everyone needs to think independently on what is best for their situation.

Regarding Hamish and Magellan funds I agree there is manager risk and fees of 1.5% means I would not be interested in ever investing with them.

Cheers
Oracle.

 

Maybe it's an age thing so it's probably best I retreat back to my retirement corner. I saw an interesting comment on this topic from Anton Taligaferro awhile back which I thought made a lot of sense.

History seems destined to repeat itself over and over so I'll continue to take a more conservative approach. I do however sincerely hope that others find good fortune with their strategies.

 

Not so.

All betashares are Aus Dom for example. QUS and MOAT are specific examples

 

Correct.

But am more interested in cap weighted index funds. Which unfortunately are very limited which are Australian domiciled.

Cheers
Oracle

 

It's interesting. And extremely difficult.

We basically cannot predict what is going to happen at all.
Maybe our market does just fine.
Maybe it does terribly.

I did consider adding NDQ at a time. I may rethink it again at some point.
But I've decided that for now, it's just not part of my strategy and doesn't suit me.
I was going to add it to my super but was not available.

With all the constant talk of these companies taking over the world, and how hopeless our market is, it makes me question how much is priced in or not.

If everyone expects it to happen, isn't the benefit getting arbitraged away?

Maybe it comes down to individual valuations?

And if this keeps up, won't the s&p500 become overly concentrated in tech companies?

So then perhaps if one is very bullish on the tech sector then just owning the US market is fine, as they will eventually dominate the index.

I personally have no idea.

By all means we should aim to reduce bank concentration in our portfolios. But I do feel comfortable with a portfolio of companies (large/mid/small) with established earnings streams who maybe won't shoot the lights out, but I don't feel like they should be written off either.

Slow and steady is fine for me. I don't feel comfortable relying on much growth so I prefer a dividend-heavy return.

Enough waffling from me.

I do think NDQ could definitely add something to a long term capital growth focused portfolio though.

 

I agree with you that overall the Nasdaq 100 companies are probably more likely to be around in 20-25yrs from now compared to the ASX200.

But shouldn't current valuations be taken into consideration?

The shiller PE for the S&P 500 has only ever been higher once, during the 2000 tech boom, in over 100yrs

Compared to that, the PE ratio of the all ords seem much more reasonably priced.

As @Nodrog stated, "History seems destined to repeat itself". Boom & bust cycles are part of life. Laws of mean reversion seems to suggest there's more downside risk in the S&P 500 than ASX right now

 

The more I see Anton talk, the more I like him.

He always seems kind of downbeat and cautious. Mostly leans towards lower PE stocks and likes receiving a good part of return through dividends.

I like his story about wandering around before early 2000s tech crash, thinking the world had gone mad but IML sticking to their approach.

His slow and steady conservative income focused approach sits very well with me and I plan to invest heavily in QVE over time.

 

Yeah that's the tricky part.

PE's are quite high but many of these tech companies are experiencing huge earnings growth.

It doesn't take long for the price to look reasonable when earnings are growing strongly.

But that's the thing who knows what happens next?

It's all too hard, haha!

 

Yes, you need to be careful about what price you pay and valuation matters.

History indeed repeats itself over and over again. But you need to be mindful of what can be expected to repeat and what not. Human fear and greed emotions can be expected to repeat in future. Overvaluation and undervaluation can be expected to repeat in future. Investments returns cannot be expected to be repeated in future unless factors that created those past returns continue to be present in future. By this I mean Australian sharemarket over past century has returned one of the highest returns around 10%-11% which is slightly higher than the US market. This can create some complacency

Why did Australian market provide such high returns? How come UK, France, Germany, Japan etc mind you all developed economies don't have such high long term returns?

Why do property investors expect Australian property to double in value every 7-10 years? Just because it has done so in the past doesn't mean it's now a rule and people go buy property thinking prices are going to double again in 7 to 10 years. Hence, why should we expect our index to produce returns higher than other developed economies going forward?

The companies we have in our index are very similar in business models to companies in those countries. Which means there must be other factors why companies here produced fantastic profits and returns for their shareholders over the past century which drove our market higher and higher. These factors could be abundance of natural resources that have always been in demand overseas, population growth, lack of competition from global companies due to low population giving local companies easy profits and other factors which I am not aware of. But I don't think innovation is major factor that drove the excessive returns in our market. I also know innovation can be driving factor in companies becoming more profitable and thus increasing shareholder returns.

Why am I mentioning all this? Because I do not believe ASX200 market can be classified as either diversified or filled with innovative companies. But the US market is, so having higher exposure to that market is actually conservative IMHO.

Last point, we do not know whether we are investing at the top of the market or not. Only in hindsight shall we know. The US market has been looking expensive for last 4 years now. Various studies have shown even investors who have invested at the top of the market but have continued to hold on have achieved very satisfactory returns. Investors who continued to buy regularly at the top and bottom are virtually guaranteed to achieve long term market returns.

It has always been the intention to increase amount of US market exposure in my portfolio. The problem is Australian investors don't have local domiciled ETFs to US cap weighted index.

Let's assume we have a 50%-50% split between Australia and Overseas market exposure.

Of the 50% overseas exposure let's say 40% is VGS (developed) and 10% is VGE/VAE (Emerging). VGS is 60% US market so in reality out of 100% stock allocation only 24% is invested in US stock market. Mind you this exposure is even less if I factor in other assets like ppor and investment properties and super which is again mostly Australian shares. So all in all it might be less than 10% if those assets are taken into account.

I am familiar with the US stock market and would like to have larger exposure and have been looking at various options that are easy to implement/follow but at same time achieve the kind of asset allocation I am after. NDQ is one such option and this is not going to be core portfolio allocation but instead satellite allocation to achieve larger US stocks exposure and at same time give some returns (capital growth over income) which I do not have to share with the ATO unless I sell.

As I have said in my previous post. I have my reasons to like and invest in NDQ just putting out my findings and thoughts out there to see if it's helpful to anyone else facing same dilemma as I am.

Cheers,
Oracle.

 

Hi Oracle, what about VTS? Go easy as I'm new to this but it looks like it has the tech stock/Nasdaq exposure but more diversified across all US markets.

Go easy on me if I'm wrong as I'm new to this!

 

It's best to buy regularly over long period of time. aka dollar cost average. If you think it's overvalued you might reduce the amount you put each month/quarter but stop buying completely can be a mistake especially if you are still in accumulation phase. US market has looked overvalued for some years now. If you stopped buying thinking it's overvalued you would have missed several years of gains.

Yes, the law of mean reversion is very well possible for both US and ASX. Best to invest where you see value. I have significant exposure already to ASX and don't believe need more exposure and would like to diversify even if it means buying overvalued US market. I plan to buy regularly over next few years so hope it will all sort itself out.

Cheers,
Oracle.

 

VTS is US domiciled ETF which means if bought under personal name you might be up for estate taxes. You are also required to fill W-8BEN every few years. So not straight forward like Australian domiciled ETF

You can overcome the estate tax issue by buying those shares under company structure. But the W-8BEN issue still remains I believe.

Hope that clarifies the problem with VTS. I wish Vanguard had total US stock market ETF domiciled in Australia.

Cheers,
Oracle.

 

Ah ok thanks. Might be a dumb question but how do you determine where it's domiciled? I couldn't see anything on vanguards fact sheet

Edit: forget that I just found it

 

My 2c

Get your structure set up and use VTS @oracle It is a far superior product at 4bps vs NDQ at 48bps. When you take a sector bet based on past returns you are making a call that the market participants have got the valuations of large cap IT/Tech wrong, in what is the most heavily researched part of the market. I’d be much more happy with a broad cap, dirt cheap product that captures the entire opportunity set rather than a concentrated bet (stock level) on a sector. That’s the way I see it, but understand you may see it differently.

 

Should diversifying return risk be the only driver of international allocation decisions? Or should matching geography of expenses and income be a consideration?

Is rebalancing volatile currencies and sometimes uncorrelated markets more important than the diversification itself?

In relation to Hamish’s thought bubble on the future – what value is a story without the discipline of numbers around it? How much terminal value is priced into the disruptors – how little into the disrupted? How sustainable is the ROE on the new technology – how secure is it against being copied or disrupted itself.

Imagine the disruption to the driverless car economy – my pilotless personal small helicopter business is going to cause – the savings in road infrastructure and the space it frees up will be worth trillions.

How susceptible are social media platforms to new generations deciding they don’t like doing what the oldies did?

How susceptible are the multinationals benefiting from globalisation if real global conflict breaks out and countries close their commercial and information flow borders? How successful have the FAANGs been with China’s relative information isolation?

How susceptible is the disproportionate gains to capital from globalisation if labor gets jack of ever declining living standards and instead of voting in Trump vote in somebody that is actually competent enough to swing the dial in their favour?

I dunno - So many questions so few answers - Oh well at least that keeps the future interesting.

Ps

I suspect the market comparison chart displayed as total return on a semi-log scale would paint a far less dramatic picture.

 

Once you have filled form W-8BEN-E (company) is there any difference between personal / company US withholding tax rate? Does the company still get 15% withholding tax rate like individual?

What about foreign income tax offsets? Do you know what are the differences between company and personal names. Do they get same amount of offsets or are offsets passed to individual along with dividends and franking credits?

May be @Terry_w might be able to answer the foreign income tax offsets question.

Cheers,
Oracle.

 

And what if held within a disc trust? Not to mention that a Labor Government is looking highly likely of being elected next term. Hence changes to taxation of trusts is one of Labors main policy initiatives.

Passive investment Disc Trusts as opposed to those running a business are likely to be hurt the most.

Sorry getting off topic but these are issues I'm thinking about.

 

AU has a tax treaty with USA. Withholding is a non issue imo, unless in super pension phase perhaps. This is what accountants are for