International Etfs: Diversify Your Portfolio, Access Global Markets

Investing in international ETFs is a great way to diversify your portfolio and reduce the risk of overexposure to stocks from your home country. International ETFs can also provide access to better growth or value opportunities than those offered by domestic markets.

International ETFs are exchange-traded funds that invest in foreign-based securities, which can be global, regional, or country-specific. They can be passively or actively managed and often provide strong diversification by investing in hundreds of companies.

By investing in international ETFs, you can gain exposure to global markets and benefit from the growth of the world economy. This type of investment can serve as a valuable hedge against domestic market fluctuations and offer the potential for greater returns in both developed and emerging markets.

However, it's important to consider the risks associated with international investing, such as currency fluctuations, geopolitical risks, and regulatory differences. It's also crucial to understand the fund's holdings, expense ratios, tracking errors, and investment distributions to ensure they align with your financial goals and risk tolerance.

Diversification and reduced risk

International ETFs can be a great way to diversify your portfolio and reduce risk. Here's how:

Diversification

International ETFs provide investors with exposure to a wide range of global markets and assets, including stocks, bonds, and securities from companies or governments in emerging and developed markets worldwide. This diversification allows investors to spread their investment opportunities and risk across different countries and regions.

For example, the Vanguard Total International Stock ETF (NASDAQ: VXUS) invests in global stocks, excluding U.S. stocks, providing investors with a unique opportunity to diversify their portfolio in both developed and emerging markets around the world.

Reduced Risk

By diversifying across different countries and regions, international ETFs can help reduce the impact of market volatility in any single location. If your home country experiences a recession, having international investments can balance out your portfolio.

Additionally, international stocks are often less correlated with U.S. equities, meaning their performance may not always be tied to domestic stock prices. This can provide investors with an opportunity to take advantage of market movements that differ from shifts in U.S. equity markets.

However, it's important to note that investing in a single foreign country can carry higher risks than investing in multiple countries through an international ETF. If a single country undergoes a recession or financial hardship, an ETF focused solely on that country could face significant performance shortfalls.

Other Considerations

When selecting an international ETF, it's crucial to pay attention to the fund's top holdings, investment distributions across sectors and regions, and your desired level of diversification and risk tolerance.

Additionally, consider the potential risks associated with international investing, such as currency fluctuations, geopolitical risks, regulatory differences, and limited market regulation and transparency.

Final Thoughts

International ETFs offer investors a convenient way to diversify their portfolios, gain exposure to global markets, and potentially reduce the impact of market volatility. By investing in a variety of countries and regions, investors can reduce the risk of putting all their "international eggs in a single foreign country's basket."

Access to emerging markets

International ETFs can provide access to emerging markets, which are often smaller, less liquid, and more volatile than developed markets. These funds combine investments in countries with developing economies, such as India, Brazil, and China, and can offer higher growth potential compared to mature economies.

For example, the iShares MSCI Emerging Markets ETF provides exposure to over 800 emerging market stocks, including those in China, India, Taiwan, South Korea, and Brazil. Similarly, the Vanguard FTSE Emerging Markets ETF Holdings also targets emerging markets, with top holdings in China, India, Taiwan, Brazil, and other countries.

Emerging markets can offer access to countries experiencing high growth, allowing companies to take advantage of favourable demographics, cheaper labour, and access to natural resources. However, it is important to note that emerging markets carry higher risks, including political and economic risks, and the risk of currency fluctuations, which are magnified in these markets.

When investing in emerging markets through international ETFs, it is crucial to carefully monitor and manage these risks. Diversification across multiple countries and sectors can help mitigate the impact of country-specific or sector-specific downturns.

Exposure to global growth

International ETFs offer investors a convenient and easy way to gain exposure to markets around the world. They allow investors to spread their investment opportunities and risks across different countries and regions, reducing the impact of market volatility in any single location. This diversification benefit is particularly important for US investors, as international markets are not always correlated with the performance of the US market.

For example, if the US market experiences a recession, international markets may be thriving, and having exposure to these markets can help balance out an investor's portfolio. International ETFs can also provide access to emerging markets, which may be experiencing higher growth rates than mature economies due to factors such as better demographics, cheaper labour, and access to natural resources.

Additionally, international equities are often more attractively valued than US stocks, with historically lower valuations. This provides compelling opportunities for investors seeking better growth or value. International ETFs also enable investors to mitigate the risk of "home bias", which is the tendency for investors to hold the majority of their portfolios in domestic assets.

By investing in international ETFs, investors can gain exposure to a diverse range of global securities, including stocks, bonds, and other securities from companies or governments in emerging and developed markets worldwide. This allows investors to benefit from the growth of the global economy and potentially achieve higher returns.

Mitigating home bias

Diversify Your Portfolio

One of the main ways to mitigate home bias is to diversify your portfolio by investing in a range of assets across different markets and countries. This can be achieved through investing in exchange-traded funds (ETFs) or mutual funds that track international indices. For example, a global ETF like the Vanguard Total World Stock ETF (VT) invests in over 8,000 companies across 49 countries, providing exposure to a diverse range of markets.

Invest in Emerging Markets

Emerging markets, such as China, India, and Brazil, often offer higher growth potential than developed markets. By investing in these markets, investors can benefit from their growth and increase the returns of their portfolio. This can be achieved through ETFs or mutual funds that track emerging market indices, such as the MSCI Emerging Markets Index.

Invest in Multinational Companies

Multinational companies operate across different markets and can provide exposure to a range of countries. For example, investing in companies like Apple, Microsoft, and Coca-Cola can give investors access to international markets without directly investing in foreign stocks.

Consider Currency Hedging

Currency fluctuations can significantly impact international investments. Investing in a currency-hedged fund can help mitigate this risk by reducing the effect of currency fluctuations on investment returns. However, currency hedging may also come with additional costs, so it is important to weigh the benefits against the costs.

Seek Professional Advice

If you are unsure about how to diversify your portfolio or reduce home bias, seeking professional advice from a financial advisor can be beneficial. They can help you develop a tailored investment strategy that considers your risk tolerance, investment goals, and other factors. Financial advisors can also educate investors about the risks of home bias and the benefits of diversification.

Access to foreign securities

International ETFs provide access to foreign securities, allowing investors to diversify their portfolios and gain exposure to global markets. This means investors can spread their investment opportunities and risks across different countries and regions, reducing the impact of market volatility in any single location.

International ETFs can be an effective way to diversify equity holdings, as they tend to be less correlated to US equities. They can also help investors avoid home country bias, where investors become overexposed to stocks from their own country. For example, if the US market is outperforming, having limited exposure to foreign stocks may seem positive. However, when global trends shift, investors could miss out on the potential for higher returns and lower volatility by not investing internationally.

International ETFs can provide access to a wide range of foreign securities, from broad-based international equity funds that cover several countries to more targeted single-market ETFs. These funds can be passively or actively managed. Passively managed ETFs are often a good option for most investors, providing automatic diversification and freeing investors from the need to consistently monitor market developments. Actively managed ETFs, on the other hand, depend on a fund manager's ability to pick securities and provide above-average returns, typically resulting in higher fees and greater volatility.

When selecting an international ETF, it is important to consider factors such as country exposure, expense ratios, tracking error, fund performance, trading volume, and ETF top holdings. It is also crucial to align your investments with your desired asset allocation and risk tolerance to avoid being overexposed to a specific region or sector.

Overall, international ETFs provide investors with a convenient way to access foreign securities, diversify their portfolios, and reduce the impact of market volatility by spreading their investments across different countries and regions.

Frequently asked questions