International investing can be tricky. The hurdles range from language and currency conversions to foreign exchange and regulations. Still, most financial advisors suggest you hold at least some foreign stocks in a diversified portfolio.
Some easy ways do exist to invest in foreign markets without picking up a new language or trading dollars for euros. Here's how to diversify abroad with U.S.-traded stocks and funds, along with tips for how to do it the right way.
The easiest and most common way to invest in foreign markets is to purchase exchange-traded funds (ETFs) or mutual funds that hold a basket of global stocks and bonds. With foreign holdings across multiple industries and countries, in one easy trade, these two fund types provide a quick and highly diverse foreign component to your portfolio.
You can also choose between many types of mutual funds or ETFs:
- International Funds invest broadly across many countries outside of the U.S.
- Regional Funds invest in specific regions, say Europe, Asia, or the Middle East.
- Country Funds invest in specific countries, like Spain or Russia.
- Sector Funds invest in certain sectors across multiple countries, like telecommunications or energy.
How to Find the Best Fund for Your Portfolio
What fund type is best for you? The answer depends on your investment objectives and appetite for risk. In general, mutual funds are actively managed by professional investors, while ETFs are passively managed with holdings based on a pre-existing index. As a result, mutual funds tend to be more costly than their passively managed counterparts.
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Once you choose the right type of fund, the next step is determining where in the world to invest.
Most financial advisors recommend that younger investors seek higher-risk funds with the time for greater returns, while older investors seek lower-risk funds that offer more stability. This often translates to greater emerging market exposure for younger investors, and developed market exposure for older investors.
Finding specific mutual funds is easiest using free online tools like the Yahoo! Finance Fund Screener or the Wall Street Journal Fund Screener. Meanwhile, ETFs can be found by browsing through some of the largest ETF providers, like iShares or SPDRs. In the end, investors should seek out low-cost, high-return funds that meet their investment objectives and risk appetite.
Buy Individual Foreign Stocks Hassle-Free with ADRs
If you prefer a hands-on approach, look at American Depository Receipts (ADRs). These are U.S.-traded securities that represent ownership in the shares of foreign companies. Since they are denominated in dollars and traded on the NYSE, NASDAQ or AMEX, ADRs do not require any complex currency conversion or foreign exchange transactions.
The downside is that many foreign stocks aren't available as ADRs and must be purchased on foreign exchanges, such as the Toronto Stock Exchange (TSE) in Canada or the London Stock Exchange (LSE) in Europe. While some international brokers—such as InteractiveBrokers—offer a cheap way to purchase these stocks, be sure to check fees with care before trading. ADRs have higher liquidity risk than common marketable stocks on the exchange. Another concern to keep in mind: unsponsored ADRs don't give the holder any voting rights.
Note
While buying and selling of ADRs occurs in U.S. dollars, any dividends issued will be denominated in the foreign currency and then converted into U.S. dollars upon distribution. As a result, there may be some currency exchange rate risk involved in those situations. There could also be foreign taxes owed on the dividends.
How to Find Opportunities in Global ADRs
Same as with international funds, investors should select individual stocks based on their investment objectives and appetite for risk.
Investors looking for relatively safe bets can seek out larger established companies with ADRs, like Sanofi-Aventis SA (NYSE: SNY) or Rio Tinto plc (NYSE: RIO). Meanwhile, if you want to take on more risk, there can be more undervalued opportunities in smaller ADRs.
Use the same stock screeners you find individual U.S. stocks with when seeking individual ADRs. One of the best free stock screeners online is Finviz's stock screener. It offers the ability to screen stocks based on a wide range of metrics.
The Bottom Line
International funds and ADRs are great ways to build global exposure into any portfolio without having to worry about foreign stocks or regulations. Keep these tips in mind ,and you'll be on your way to portfolio diversification.
