How to keep costs low when trading internationally

Breaking down the numbers: a trade scenario

Take a scenario in which an Australian-based investor, with a “home” currency of AUD, wishes to purchase an equity on the US NASDAQ which costs USD 50.

Let’s say the investor has a choice between two investment brokers – one which charges a 0.25% FX mark-up as its currency conversion fee, and another which charges 0.45% FX mark-up as its currency conversion fee. This means that a 0.25% or 0.45% mark-up is applied to the prevailing exchange rate – the FX spot mid-price. For the sake of simplicity and illustration, let’s say the FX spot mid-price for AUD/USD in this scenario is a flat 0.70000.

A 0.25% FX mark-up on a 0.70000 AUD/USD spot mid-price will result in an exchange rate for the investor of 0.69825, while a 0.45% FX mark-up on a 0.70000 AUD/USD spot mid-price will result in an exchange rate for the investor of 0.69685.

The difference? A paltry 0.00140 – or so it appears.

This means that for every AUD 1 the investor converts to USD, they’ll get to keep USD 0.0014 more by selecting the broker with a 0.25% FX mark-up as its currency conversion fee.

If the investor converted AUD 100 to USD, they’d be USD 0.14 better off – not that much. But as the AUD sum for conversion to USD climbs, so the savings build up, and fast. By the time they’re seeking to transfer AUD 80,000 to USD, the saving has risen to USD 112.

Presuming brokerage costs for US equities at the two investment brokers are equal (in this scenario, 0.03% of the overall trade value), the investor can either save USD 112 or buy two additional USD 50 equities with the same sum of AUD. Should the investment broker with the cheaper currency conversion costs also offer a cheaper brokerage fee per trade, these benefits become even larger, as the investor saves on both FX and brokerage.

That means more compounding benefits and more dividends – boosting the investor’s overall returns and helping them achieve their long-term investing goals.

Supercharging portfolio diversification

Also keep in mind – this outcome stems from a single (albeit large) trade. Adding diversity to a portfolio through a selection of stocks across different sectors and markets has long been considered a way to lower risk, avoid unnecessary stress, and improve the likelihood of positive portfolio growth over the longer term. As noted by Nobel prize laureate Harry Markowitz, diversification is the only “free lunch” in investing.

Saxo research shows that, by blending a five-stock portfolio 50/50 with a broader equity market Exchange-Traded Fund (ETF), investors can significantly reduce their risk levels without sacrificing long-term expected returns.

And as investors build a diversified, “all-seasons” portfolio, their overall savings on international equity trades will only grow with the more affordable broker, enabling them to save more of their hard-earned money, put more of their money to work in the markets, or both. Consider it a way to “supercharge” portfolio diversification – and get a taste of that “free lunch”.