International ETFs: A Guide to Diversify Your Portfolio
When it comes to investing, diversification is often touted as a key strategy to mitigate risk and potentially increase returns. One way to achieve diversification is by considering international investments. International exchange-traded funds (ETFs) offer investors the opportunity to gain exposure to various global markets without the need for direct stock picking or extensive research. In this article, we will explore what international ETFs are, their benefits and risks, and provide some examples of popular ones in the market.
What are International ETFs?
An exchange-traded fund (ETF) is an investment fund that trades on stock exchanges like individual stocks. It typically holds a basket of securities such as stocks, bonds, or commodities. International ETFs specifically focus on investing in companies located outside of your home country. These funds allow investors access to foreign markets and can be used to diversify their portfolios geographically.
Benefits of Investing in International ETFs
1. Diversification: By investing in international ETFs, you can spread your investment across different countries and sectors. This helps reduce the impact of any downturn in a single market or industry on your overall portfolio.
2. Exposure to Emerging Markets: Many international ETFs provide exposure to emerging economies with high growth potential but limited access through traditional investments. Investing in these regions can be advantageous for long-term growth opportunities.
3. Currency Exposure: When you invest internationally, you also expose yourself to currency fluctuations which can work both ways – either amplifying gains or losses compared to your local currency.
4. Accessible Alternative: International investing was once only available through mutual funds with higher expense ratios and minimum investment requirements than most international ETFs today.
Risks Associated with International ETFs
1. Political and Economic Risks: Different countries have varying political stability levels and economic conditions that may affect their performance significantly.
2. Currency Risk: While currency exposure can be beneficial, it also introduces volatility. Currency fluctuations can impact returns when converting back to your home currency.
3. Regulatory Risks: Countries have different regulatory environments which can affect how businesses operate and ultimately impact the performance of international ETFs.
4. Liquidity Risk: Some international markets may have less liquidity compared to major exchanges, potentially making it difficult to buy or sell shares at desired prices.
Examples of Popular International ETFs
1. iShares MSCI EAFE ETF (EFA): This ETF tracks the performance of companies in developed markets outside of North America, including Europe, Australia, and Asia. It provides broad exposure to foreign equities while excluding Canadian and American companies.
2. Vanguard FTSE Emerging Markets ETF (VWO): This fund focuses on emerging market economies such as China, Taiwan, India, Brazil, and South Africa. It offers an opportunity for investors seeking growth potential from these regions.
3. Schwab International Equity ETF (SCHF): Designed to track the performance of large- and mid-cap stocks from developed countries around the world (excluding the US), SCHF provides a low-cost option for international diversification.
4. iShares Core MSCI Total International Stock ETF (IXUS): This fund aims to reflect the performance of an index that measures equity market investments in global developed and emerging markets outside of the US.
5. SPDR S&P Global Dividend Aristocrats ETF (WDIV): WDIV targets companies with a history of increasing dividend payouts globally across both developed and emerging markets.
Conclusion
International investing through exchange-traded funds offers investors a convenient way to diversify their portfolios beyond domestic boundaries while potentially capturing growth opportunities in foreign markets. However, it’s important to consider risks associated with political stability, economic conditions, currency fluctuations, regulatory environments, and liquidity before investing in international ETFs. By conducting thorough research or consulting with a financial advisor who understands your investment goals and risk tolerance, you can determine the right mix of international ETFs to achieve your objectives. Remember, diversification is key to building a resilient investment portfolio.