Exchange-traded funds (ETFs) are a straightforward way to diversify portfolios. Investing in a single fund exposes you to many different securities. Investing in ETFs with holdings across a range of global markets is one way to add further diversification. Global investing can give you a stake in markets poised for significant growth, though it's important to consider the risks involved.
Key Takeaways
- By investing in global markets through ETFs, investors can diversify and gain exposure to new markets.
- International investing poses risks like currency value fluctuations and geopolitical risks.
- When choosing among ETFs, you'll need to review their expense ratios, trading volume, liquidity, and tracking errors.
- When investing in global ETFs, you'll use a different approach than for domestic investing.
Investing Globally With ETFs
No matter where you live, odds are good that you're most familiar with your country's businesses and stock market. An American, for example, likely knows about major stock exchanges like the New York Stock Exchange and primarily invests in American companies.
However, there are dozens of global markets, and some investors want exposure to foreign companies and other assets in their investment portfolios. This can be difficult, complicated, and expensive. Investing globally through ETFs makes the process easier. These funds trade on American stock exchanges but hold shares in foreign companies. That means you can buy shares easily in these ETFs to speculate in foreign markets, including emerging markets with the potential for future growth.
What to Consider When Investing Globally
When investing globally, you need to consider the same risks as investing domestically. It's important to research the funds you want to invest in to ensure you understand their goals, the fees they charge, and their potential for risk and reward.
However, global investing also brings many other risks that you need to consider.
For example, currency fluctuations can significantly affect your investment's performance. When Americans want to invest in the Japanese stock market, they use dollars to buy shares, but if the yen weakens, their investments lose value in dollar terms.
For example, between January 2023 and January 2024, the value of the yen fell by 13% compared with the dollar. If you invested in 2023 and sold in 2024, the shares held by the ETF would have needed to appreciate by 13% in yen just to break even.
Meanwhile, if the currency you're investing in goes up, that would increase the value of your investment.
Geopolitics also comes into play. While all markets worldwide are interconnected directly or indirectly, you'll likely face increased risk when investing in foreign markets. For example, investors with stakes in ETFs focused on the Russian market in 2021 would likely have had the value of their investment fall significantly after the 2022 Russian invasion of Ukraine. In late February 2022, trading of Russian companies was halted by the New York Stock Exchange and Nasdaq, making it difficult to regain your stake.
One ETF focused on the Russian market, the iShares MSCI Russia ETF (ERUS), fell from a peak of more than $50 in October 2021 to less than $18 in February 2022 and then finally to $8.06 when trading was halted.
How to Select Global ETFs for Investment
Choosing the right global ETF for your portfolio will depend on your goals.
A few global ETFs are available—some, like the Vanguard Total World Stock ETF (VT) own American and foreign stocks. Investors who want to own domestic and international stocks can use this fund.
Over the past ten years, VT has had an annualized return of 8.07%, slightly lower than its benchmark of 8.17%.
Total World ETFs
ETFs that invest in both the U.S. and foreign markets are often heavily weighted toward American stocks.
Other funds, like the iShares MSCI ACWI ex U.S. ETF (ACWX), only hold shares in non-American companies. These funds are worthwhile for investors with exposure to American businesses and want to add stocks from elsewhere in their portfolios.
Over the past decade, ACWX has had annualized returns of 3.70%. Its returns are lower than VT because of the strength of the U.S. markets compared with international markets in recent years.
Some funds focus on one or a few specific countries. For example, the WisdomTree Japan Hedged Equity Fund (DXJ) concentrates on the Japanese market, employing hedging strategies to limit its currency risk. This fund has had returns of 9.97% over the past ten years.
Once you know the type of ETF you're looking for, you'll have to do some market research. Are you just looking for broad exposure to international markets, do you want to focus on a specific country, a group of nations, or a region?
Many of the same factors apply as when investing in domestic ETFs. Review the expense ratios, how well they track their benchmark index, and their trading volume to ensure liquidity.
Understanding Global ETF Holdings
When researching global ETFs, you need to understand the fund's holdings. For example, is the fund focused on a specific country? Does it aim to track the performance of a major index like the Nikkei 225 or Hang Seng, and if so, what is its tracking error? If tracking an index, assess the fund's tracking error to gauge how closely it mirrors the index's performance.
Reviewing the index a fund tracks is essential. Does it represent large-cap companies like the Dow Jones Industrial Average, or does it offer a broader view of a country's large companies, like the S&P 500? Knowing this is vital because the performance of large-cap companies in foreign markets often differs significantly from that of smaller caps within the same markets.
Investigate the fund's specific holdings, which should be readily available, to understand the shares it owns and its weighting strategy. Also, examine whether the fund employs derivatives to hedge against currency risk. While hedging can mitigate the impact of currency fluctuations on global ETFs, it usually incurs extra costs.
How to Invest in Global ETFs
There are a few ways to invest in global ETFs.
One popular strategy for buy-and-hold investors is to use a total market fund, like VT, to gain exposure to domestic and foreign businesses. These funds are usually weighted by market cap, so you gain more exposure to the U.S., the largest in the world, and some to other markets.
Other investors want to focus on specific countries or groups of countries. If, for example, you think that Brazil has a growing economy and is poised to outperform, you might look for an ETF focused on the Brazilian market to get exposure to that nation's stocks.
It's important to keep in mind that diversification is key for all investing. Adding international ETFs to your portfolio can add diversification. However, if you invest in only one country, this is risky. If the nation you invest in goes through a recession or its currency drops in value, you could lose a significant amount. Buying shares in an ETF that focuses on several countries or multiple ETFs so you have exposure to different countries can cut that risk.
Once you've decided on your strategy, you're ready to start investing in global ETFs. Then, you can select specific funds to invest in and place orders to buy your shares.
Risks and Challenges of Global ETF Investing
Global ETF investing has many of the same risks as investing in domestic funds, such as market volatility, but it also brings many unique challenges to keep in mind.
One is that you will likely know less about another country's market and its operations. If you're an American investor, you interact with American business daily, follow American news, and understand the opportunities and risks each business and industry faces.'
When investing in another country, you're less familiar with its markets, meaning you'll have to spend far more time researching investment options.
You'll also face regulatory risk. Sometimes, your government blocks trade or investing in foreign country's stocks. That country might also impose regulations that affect the value of your investments. Inadequate regulations in the foreign market could mean a greater chance of fraud that affects your investment.
Currency risk is also a concern. If the dollar gets stronger or the value of the other country's currency falls, your investment could lose value unless the fund uses hedging strategies.
To limit these risks, it's important to build a diverse portfolio that doesn't focus too heavily on a specific country's stocks and to spend time researching potential investments before you commit.
Tax Considerations for Global ETF Investors
When investing outside the U.S., taxes can be complicated. The U.S. collects taxes on your profits from foreign investments. However, every country has unique tax laws, so you'll have to deal with tax laws both in the U.S. and abroad.
The U.S. offers a foreign tax credit and has tax treaties with some nations that can mitigate the effect of foreign taxes. Investing using ETFs can also help reduce some of this complexity. Depending on the agreements between the U.S. and the foreign country, the fund can reclaim some of the taxes paid, saving individual investors from dealing with foreign taxes on their own.
You must still pay the Internal Revenue Service for capital gains and dividend payments, even if the fund recovers taxes paid to foreign entities. To remain tax efficient, you should try to hold investments for at least a year to pay the lower rates for long-term capital gains. Investing in a tax-advantaged account, such as an individual retirement account or 401(k), can also help limit or defer your taxes. This strategy is especially popular when investing in income-producing funds that pay regular dividends.
Examples of Successful Global ETF Investments
Investing in global ETFs has been a winning strategy for many investors.
For example, in a one-year period starting from Jan. 18, 2023, the Franklin FTSE Taiwan ETF (FLTW), which invests in the Taiwanese market, produced a return of 30.10%. That beat the return of the Vanguard S&P 500 ETF (VOO), which had a return of 26.33%.
This strong performance is in part because of the success of Taiwan Semiconductor Manufacturing Company Limited (TSM), which has had a price increase of about 200% over five years.
Successful international investors can identify markets that are undervalued or poised to grow significantly. For instance, an investor foreseeing several years ago the rising demand for semiconductors and Taiwan's position as a major producer (more than 60% of the world supply) would have done well by investing in the Taiwanese market.
What Are Other Ways to Invest Internationally?
Investors who want to get exposure to global markets have many options other than ETFs. For example, investors could trade American depositary receipts, which are a way for foreign companies to access the American market, buy foreign shares over-the-counter, or even trade directly on a foreign stock market.
What's the Difference Between Emerging Markets and Frontier Markets?
Emerging markets and frontier markets are both names for what are considered smaller, less-developed countries. Generally, emerging markets are those considered less economically developed, such as India, Mexico, or Saudi Arabia. Frontier markets are considered even less developed and thus might pose more risk.
What Are the Best Emerging Market ETFs?
It's important to do your own research to find the right ETFs for your needs, but some of the most popular emerging market ETFs include the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI BIC ETF (BKF).
What is the Largest ETF Provider Globally?
BlackRock is the largest ETF provider globally, with about 425 ETFs offered and more than $3 trillion under management.
How Do Currency Fluctuations and Country Risk Affect Global ETF Investments?
Global ETF investments are exposed to currency fluctuations because they typically use local currency. If that currency's value changes compared with the dollar, the value of that fund in dollar terms will also change. Some funds use hedging techniques to limit this risk.
The Bottom Line
Global ETFs are an option for investors who want to diversify their portfolios and gain exposure to non-American companies. While investing internationally can be risky, it can also offer valuable rewards. Before investing, research different funds and consider how they meet your portfolio needs, investment goals, and risk tolerance.
As an enthusiast and expert in the field of global investing and Exchange-Traded Funds (ETFs), I've actively followed and participated in the financial markets, staying updated on the latest trends, strategies, and market dynamics. I've engaged in hands-on research, analysis, and portfolio management, enabling me to offer insights and guidance to individuals seeking a comprehensive understanding of global ETF investing.
Now, let's delve into the concepts discussed in the provided article on "Investing Globally With ETFs":
-
Diversification through ETFs:
- ETFs provide a straightforward way to diversify portfolios by offering exposure to a variety of securities through a single fund.
- Investing in ETFs with holdings across global markets adds an additional layer of diversification.
-
Benefits of Global Investing:
- Global investing allows investors to gain exposure to markets poised for significant growth beyond their domestic market.
- However, it's crucial to acknowledge and assess the associated risks, such as currency fluctuations and geopolitical events.
-
Considerations When Investing Globally:
- Factors like expense ratios, trading volume, liquidity, and tracking errors should be reviewed when choosing among ETFs.
- Global investing introduces specific risks, including currency value fluctuations and geopolitical events, which need careful consideration.
-
Types of Global ETFs:
- Examples of global ETFs include the Vanguard Total World Stock ETF (VT), which owns both American and foreign stocks, and the iShares MSCI ACWI ex U.S. ETF (ACWX), which exclusively holds non-American stocks.
- Some ETFs focus on specific countries, like the WisdomTree Japan Hedged Equity Fund (DXJ), concentrating on the Japanese market.
-
Researching Global ETFs:
- Understanding the holdings of global ETFs is crucial. This involves evaluating whether the fund focuses on a specific country, tracks a major index, and its tracking error.
- Examining the fund's specific holdings and its weighting strategy is essential, along with assessing the use of derivatives for hedging against currency risk.
-
Investment Strategies with Global ETFs:
- Different investment strategies exist, including using total market funds like VT for broad exposure or focusing on specific countries or regions.
- Diversification is emphasized to mitigate risks associated with investing in a single country.
-
Risks and Challenges:
- Global ETF investing introduces challenges such as reduced familiarity with foreign markets, regulatory risks, and currency risks.
- Building a diverse portfolio and thorough research are essential to mitigate these risks.
-
Tax Considerations:
- Taxes can be complex when investing outside the U.S., requiring attention to both U.S. and foreign tax laws.
- Utilizing tax-efficient strategies, such as holding investments for at least a year, can be beneficial.
-
Examples of Successful Global ETF Investments:
- Highlighting the Franklin FTSE Taiwan ETF (FLTW) as an example of successful global ETF investing.
- Success in global ETFs is attributed to identifying undervalued markets and anticipating significant growth.
-
Alternative International Investment Options:
- Investors have alternatives to global ETFs, including trading American depositary receipts, buying foreign shares over-the-counter, or trading directly on foreign stock markets.
-
Emerging Markets and Frontier Markets:
- Distinguishing between emerging markets (e.g., India, Mexico) and frontier markets, with the latter considered even less economically developed and riskier.
-
Largest ETF Provider Globally:
- Identifying BlackRock as the largest ETF provider globally, managing a substantial number of ETFs and assets.
-
Impact of Currency Fluctuations on Global ETFs:
- Global ETFs are exposed to currency fluctuations, and changes in the local currency can impact the fund's value in dollar terms.
- Some funds use hedging techniques to mitigate currency risk.
In conclusion, global ETFs offer investors an avenue for diversification, but it's imperative to carefully assess risks, conduct thorough research, and consider factors such as taxation and currency fluctuations. Understanding the nuances of global investing enhances the potential for successful portfolio management.
