Is international exposure worth the hype?
Diversification is the foundation of any good portfolio. Diversification provides a cushion to unforeseen volatilities from the future.
In today’s integrated world, getting hold of foreign stocks, bonds, and mutual funds has become much easier. New-age investors can now have a balance of domestic and international securities in a portfolio.
An international portfolio is a collection of stocks and other assets focused on global markets rather than home markets. An international portfolio, if well-designed, provides exposure to emerging and developed economies and diversification.
Buying an exchange-traded fund (ETF) that focuses on foreign equities is the most cost-effective approach for investors to own an international portfolio.
Let’s now look at some of the advantages and disadvantages of having international exposure in the portfolio.
It is possible to lessen investment risk by having an international portfolio. Gains in the investor’s global holdings help increase profits if domestic stocks underperform.
Risk can be further lowered by diversifying the international portfolio with stocks from developed and emerging markets.
Varied currency exposure
When investors purchase stocks for a global portfolio, they also buy currencies in which stocks are denominated.
As a result, currency fluctuations might help the investor offset losses or raise gains depending on the currency movements. It does, however, come with its own set of dangers.
An investor with a global portfolio can take advantage of several countries’ market cycles.
Accessing the entire supply chain
International investing provides opportunities across industries as well as up and down the value chain often missed in domestic portfolios.
Manufacturing, services, and technology are all tiers in the supply chain. These companies benefit the most from the multiple stages of the global supply chain.
Beyond the home market, there is world-class innovation in industrial automation, payments, and renewable energy.
Political and economic risk
Many emerging countries lack the same political and economic stability as industrialized economies. Instability can drive already invested or budding investors away from the market.
Enlarged transaction costs
When buying and selling international equities, investors often pay higher commissions and brokerage fees, lowering their overall returns.
Taxes, stamp charges, levies, and exchange fees may be required, further diluting gains. Many of these fees can be eliminated or reduced using ETFs or index funds to get exposure to a foreign portfolio.
Regarding assets, two ETFs stand out above the rest for individuals seeking broad exposure to international markets. With $110.3 billion in assets under management, the Vanguard FTSE Developed Markets ETF (VEA) is the largest.
The iShares Core MSCI EAFE ETF (IEFA), benchmarked to an MSCI index rather than an FTSE Russell-managed index, has amassed $104.34 billion in assets. These ETFs are best placed only to get the investor an upper edge over the developed markets.
The most significant distinction between the two funds is the nations they provide exposure to. South Korea is a developed market in the FTSE index tracked by VEA, accounting for approximately 5% of the fund.
South Korea is not included in the IEFA’s MSCI index because it is listed as an emerging market by MSCI. Canada is also not included in IEFA because the fund ignores North America, even though it is VEA’s third most significant country exposure.
ETFs like the iShares Core MSCI Total International Stock ETF (IXUS) and the Vanguard FTSE All-World ex-US ETF (VEU) contain both developed and exposure for those who want their international exposure to include emerging markets.
IXUS currently has around 12.5 percent of its portfolio invested in developing market companies, while VEU has 13.1 percent. It is a bit riskier than the developed markets due to the very structure of the emerging economies, which inculcates volatilities in the business environment.
Over the last decade, investors have done well while investing in the United States. This is particularly true when comparing U.S. equities returns against international equity returns.
However, trends change, and given the challenges in the United States and the opportunities that may exist elsewhere, investors may be more open to channeling funds outside of the United States to more countries for international exposure.
However, international exposure may win or lose, and investors should do their due diligence before investing.