Over and above investing in Australian and US companies we use share index futures and Exchange Traded Funds (ETFs) to gain exposure to specific countries without having to invest in individual shares.
Index futures are very liquid and extremely cost effective. They allow taking advantage of rising markets (long) and also falling markets (short). Through short positions we thus can achieve positive returns in bear markets when the typical buy and hold strategy suffers investment losses and a period of an often significant drawdown. Through a margin payment (good faith deposit) of somewhere between 5 % - 10 % of face value of the contract significant leverage can be achieved. This may not be appropriate for most investors, particularly SMSFs, and we usually recommend very low or no leverage through fully funding the index future contract.
Exchange traded funds (ETFs) represent shares of ownership in either funds or unit investment trusts that hold portfolios of common stocks or bonds, which are designed to generally correspond to the price and yield performance of their underlying indexes, either broad stock market, stock industry sector, international stock, or bond. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks or bonds in a single security, as easily as buying or selling a share of stock. A small selection of ETFs is listed on the Australian Stock Exchange whereas US markets list 1500 + ETFs. Market makers can create and redeem ETFs and thus provide necessary liquidity. ETFs tend to be more cost effective than futures if held for two years or longer.
We rate the major index futures in the same way as Australian and US shares with weekly updates via our website.
Through these financial instruments we can gain more direct exposure to Europe and Asia without having to invest in individual shares. We explain our approach in more detail in our free e-book.
"Index futures are very liquid and extremely cost effective. They allow taking advantage of rising markets (long) and also falling markets (short)."