Once the domain of institutional investors and high-end clients only, international direct investing is becoming much more accessible to the retail investor.

Yes, the brokerage fees are a little high, there are offshore tax issues and no franking credits, but international markets offer you opportunities and a level of diversification that is impossible to achieve by investing in Australian equities alone.

(Barrie Dunstan wrote about the importance of including international shares in your portfolio late last year and in June we covered funds that offer good international exposure if you don’t like picking the stocks yourself.)

Darren Moglia, head of broking, products and sales at Westpac Online Investing, says that the US is the most popular of international markets they offer, with major sectors being financials, industrials and technology.

“Some of the major tech stocks [traded are] things such as Apple and Google, which are very popular,” he says.

Most brokers report that less than 1% of their clients’ trades are in international companies, but that number is steadily growing.

Brian Phelps, CommSec, general manager of distribution, business and private banking, says they reached their financial year target for international accounts by January and had 500 new international accounts opened in the last six weeks alone.

He says: “93% of revenue comes from the US markets. Apple is our largest holding and has been for some time”.

Cost

There is brokerage cost, which varies widely between brokers and markets. As a general rule, the bigger and more liquid a market, the cheaper it probably is to access.

But brokerage cost isn’t the only fee you need to take into account. Some online brokers charge what are sometimes called inactive account fees.

Because they use an external provider to help them out, like Pershing in the US, there will be custody fee of anything between $US63 (Westpac Online Investing) to $USD68 (CommSec) per annum if your account is inactive.

CommSec says they also charge clients trading non-US markets a $2 monthly holding fee.

Saxo Capital Markets’ head of sales Stephen Luu, says they don’t charge anything in addition to their brokerage fees.

There will also probably be a foreign exchange fee of less than a percentage point to convert any income or capital gains made back into Australian dollars as well. However no brokers specified this when we asked about additional costs, so make sure you clarify this before you sign onto a broker.

Click here for a table of costs from major brokers but check with their websites to see if there have been any changes before you commit.

Tax

On income from the US, such as dividends, tax is usually deducted and withheld at a rate of 15%. You will generally be able to claim an offset in Australia for the tax that has been withheld.

However, if you haven’t completed the W-8BEN form – a form from the US Department of Inland Revenue which certifies you’re not a US resident – extra tax will be deducted, so make sure you complete this before you start trading.

“Whenever they open accounts, normally the brokers should inform the client they need to complete the W-8BEN,” Stephen Luu adds.

“If they fail to complete that form, we don’t allow them to trade the US.”

This form can also cover you for other markets, if your broker uses an international partner like Pershing.

Dividends and franking credits

The main reason that many investors give for not investing overseas is the lack of dividends and franking credits. Obviously franking credits are only available in Australia, but some institutional investors say this should not be a primary reason for investing.

“You shouldn’t invest in [something] because of franking credits. That shouldn’t be your method of investing…it is just a slight benefit,” Chad Padowitz, chief investment officer of international fund manager Wingate Asset Management, says.

The SMSF investor, with their income focus, obviously has a slightly different take but what is interesting is that many international companies are increasing their dividend payouts.

“I think [growing] dividends are going to be a big focus of US markets,” founder of Morphic Asset Management, Jack Lowenstein, says and cites US banks as an example.

“I think they [US banks] are over capitalised…they will actually edge up their dividends.”

Apple is another example. Its recent $US17 billion debt raising has drawn criticism, but the tech giant raised the capital to pay dividends to share holders and keep them happy.

Investment strategy

Finally, once you’ve made the decision to invest offshore, as an SMSF trustee, if your fund hasn’t invested in international markets before, then you need to include your reasoning behind why you want to do it and how you’re going to do it in your investment strategy.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

• Barrie Dunstan: SMSFs a force to be reckoned with
• Roger Montgomery: A good-value medical opportunity in LifeHealthcare
• Penny Pryor: SMSFs square up for battle
• Tony Negline:  Three important super issues you need to know about
• Question of the week: Are insurance companies worth holding on to – or buying?