U.S. investors are reminded daily of the importance of global trade and economic news, as shown by stock market movement tied to Brexit or a China trade deal. The modern stock market is incredibly interconnected across national borders. That begs the question, then, whether your portfolio properly reflects these dynamics. Even though the biggest U.S.-listed companies often book a lot of revenue overseas, it is important for investors to consider geographic diversification in the modern economy. Direct exposure to foreign countries ensures investors can tap into the biggest opportunities and mitigate market risks. If you think you may need a bit more global flavor in your portfolio, these ETFs are a good start.
Vanguard FTSE Developed Markets ETF
This Vanguard fund (VEA) is not just one of the largest international ETFs but also one of the biggest ETFs on all of Wall Street with $80 billion in assets under management. Its popularity stems from its ability to provide broad, low-cost exposure to key developed international markets in Europe and Asia that feature mature, well-known companies. Right now, VEA's portfolio spans 3,900 stocks with its biggest positions including stakes in Swiss consumer goods giant Nestle (NSRGY) and Korean electronics manufacturer Samsung (SSNLF). And as is typical of Vanguard's index funds, this ETF offers broad exposure for a rock-bottom expense ratio. Fees tally just 0.05% annually, or $5 a year on every $10,000 invested.
iShares MSCI EAFE Small-Cap ETF
What if you like the notion of investing in developed markets but want to move beyond the big multinationals that make up the bulk of the prior fund's holdings? Well, iShares has the answer in a small-cap fund focused on EAFE stocks (SCZ), which means companies located in Europe, Australasia and the Far East. Nations representing the biggest part of SCZ's portfolio right now are Japan at nearly 30% and the United Kingdom at about 19%. However, the largest stock is only valued at around $8 billion with a median market cap of less than $1 billion for constituents. That ensures you're reaching smaller companies that international investors may not otherwise be able to access.
Xtrackers MSCI EAFE Currency-Hedged Equity Fund
One of the challenges of international investing is managing the risk of fluctuating currency exchange rates. Though the market dynamics behind currency rates can be complex, the broad concept is pretty simple. When a local currency is steadily weakening versus its peers on the global market, then the sales companies book there are effectively discounted as buyers use increasingly less valuable currency to pay their bills. This Xtrackers fund (DBEF) mitigates some of that risk by investing not just in foreign stocks but also foreign currencies. This should smooth out returns and provide a harder link to a region's actual economic and stock market performance.
iShares Edge MSCI Min Vol EAFE ETF
As investors get increasingly worried about geopolitical events, there has been a rise in interest around low volatility investments strategies. These strategies may leave a little profit on the table during the good times, but many people are happy to trade that potential in exchange for the ability for a fund to hang tough when times turn bad. That's what this iShares fund (EFAV) offers, with a focus on the same EAFE region as the prior two funds but a strategy that focuses on lower volatility investments. Think stocks like Swiss pharmaceutical company Roche that can rely on patients buying its drugs in good times and bad.
iShares International Select Dividend ETF
Another way to play global stocks that could appeal to risk-averse investors is a focus on dividend payers (IDV). Companies that pay out regular distributions to their shareholders are naturally more stable, since they have to have excess profits to fund those dividends, and the income these stocks provide can be seen as protection against modest market declines. Top holdings at present include British American Tobacco (BTI), which currently yields about 5.9% annually. The fund at large yields about 5.1% based on the last 12 months of distributions. For those who want a bit more stability in their global exposure, this consistent income potential is a great hedge.
Vanguard FTSE Emerging Markets ETF
Investors looking to tap into the big growth potential of emerging markets may not find what they're looking for in the prior ETFs. If you're looking for exposure to faster growing regions such as Brazil, China and India, then consider this VWO fund (VWO) as a simple and effective way to execute that strategy. Top holdings include big name Chinese stocks like the $600 billion Alibaba Group Holding (BABA) but also a deep list of more than 5,000 stocks ensures you'll also get exposure to up-and-coming firms in regions across Asia and South America that you may not otherwise know to access.
Schwab Fundamental Emerging Markets Large Company Index ETF
If you like the general potential of emerging markets but are a bit worried about those smaller companies at the bottom, FNDE (FNDE) helps split the difference. Unlike many other international funds, the portfolio is focused on a list of less than 300 total holdings. Among these, the average market capitalization is around $65 billion at present. Russia's state-run energy giant Gazprom and Asian chipmaker Taiwan Semiconductor Manufacturing Co. (TSM) are at the top of the holdings. However, no single stock represents more than about 4% of the portfolio and no single country represents more than 25% of the fund's makeup.
WisdomTree Emerging Markets High Dividend Fund
Another way to play emerging markets with a focus on stability is to layer in a dividend strategy that provides a bit more certainty. As mentioned before, dividend ETFs tend to have a lower risk profile thanks to a reliance on component stocks with a track record of profitability. This can be a particularly effective technique in emerging markets where intelligence on individual companies can be harder to obtain. In addition to the simple reality of language barriers, government regulations and stock exchange standards differ greatly across jurisdictions and can make businesses difficult to understand. DEM's (DEM) generous 4.8% yield goes a long way to providing a bit more certainty to your overseas investment.
Vanguard Total World Stock ETF
Can't decide how to balance emerging versus developed markets? Wondering how to fit in your domestic stock exposure into the puzzle? Then perhaps the elegantly simple Total World fund from Vanguard (VT) is right for you. As the name implies, this ETF covers every market on the planet. And with a massive list of nearly 9,000 holdings, it is an incredibly broad fund that covers just about every sector and geography in one place. A potential drawback is that VT includes U.S. stocks you may already own, such as Apple (AAPL), but if you don't want to overthink a global investment strategy, this is an easy way to get geographic diversification.
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