Diversification is tricky. It takes time and research to choose investments that balance out. While there is no substitute for due diligence, one solution is to look to exchange-traded funds (ETFs).
These are funds that are designed to mimic an index. The SPDR S&P 500 ETF is a good example. It contains shares from more than 500 companies. Together, they imitate the performance of the S&P 500.
There is an expense ratio to consider, but it is normally much less than that of a mutual fund or another actively-managed fund because ETFs are passive.
Holding an ETF in your portfolio is one way to gain exposure to a group of equities or bonds.
In the case of the SPDR S&P 500 ETF, you get the S&P 500, but there are many other possibilities including several foreign options.
There are specific ETFs that mimic the financial situation in a particular country (e.g., iShares MSCI Germany Index ETF) as well as broad ETFs that focus on a region (e.g., iShares MSCI BRIC Index ETF).
There are also ETFs that focus on emerging markets (e.g. EEMA), foreign currencies, commodities, and international bonds.
Let’s look at three international ETFs in greater detail.
The Vanguard Total International Stock Index ETF (VGTSX) is designed to mirror the FTSE Global All Cap, minus the US Index.
It includes thousands of equities. Some of the ETF’s top holdings include Samsung and HSBC, and Nestle.
Together, they span both developed countries and emerging foreign markets. The ratio is roughly 85:15.
The expense ratio is 0.18% and there is a minimum investment of $3,000.
Large scale investors have the option of joining Vanguard’s Admiral Class. It has a $10,000 minimum investment but the expense ratio is lower.
The Vanguard Total International Stock Index ETF has been around since 1996. According to Morningstar, its risk is comparable to similar funds looking at the previous three -year period, but its level of return is above average for the same period. It has returned almost 10% over the past three years.
The risk for this ETF’s trailing 10 years is above average but its return for the same period was average compared to its peers. VGTSX posted a 5.12% return for the trailing 10-year period.
This ETF is going to let you diversify against US stocks by hedging with equities from literally everywhere except the US.
The Vanguard FTSE Emerging Markets ETF (VWO) includes a variety of large-cap stocks and small-cap companies.
This fund mimics the FTSE Emerging Markets All Cap China A Inclusion Index in which more than 20 countries from emerging markets are represented.
Around 58% of this ETF is made up of stocks from emerging markets in Asia, including China.
This is a slightly higher weighting than other emerging market ETFs, which average 45%.
VWO is also heavily weighted toward technology and financial services. These two sectors comprise 45% of the fund.
The expense ratio for the Vanguard FTSE Emerging Markets ETF is 0.14%.
This fund is no riskier than others in emerging markets looking a three- and five-year trailing averages, VWO is average.
However, investing in emerging markets always comes with uncertainty.
Each holding and there are more than 4,100 in this fund is subject to a variety of risks.
Political and economic situations can factor in as well as currency rates. In addition, the financial markets in some of these emerging markets may not be stable and some accounting rules questionable by industrialized standards.
Then, there is the weighting.
In the case of the Vanguard FTSE Emerging Markets ETF, you are gaining exposure to emerging markets with an emphasis on Asia, technology, and financial services. Only you can decide if this is a bet that you want to make.
Finally, let’s look at the Schwab International Equity ETF (SCHF).
Like VWO, the SCHF has Nestle, HSBC, and Samsung in its top holdings, but its overall composition is different.
Over 60% of this ETF is divided between European and Japanese companies. UK companies also take up almost 15% of the portfolio.
The most highly represented sectors include financial services, industrials, and cyclical consumer goods. It is also weighted toward large-cap companies.
The Schwab International Equity ETF includes almost 1,500 securities. Only 15% of them are mid-cap.
The expense ratio for this fund is 0.06%.
Looking at the Schwab International Equity ETF’s risk profile, for the trailing three- and five-year periods, this fund is showing more risk than many of its peers, but it has also posted returns that are above average for those periods.
Investing in the stock market does not have to mean investing in individual stocks.
You do not even have to limit your investments to the US markets.
Investing in foreign ETFs are a good way to gain exposure to companies, countries, and regions that you may not know well enough to invest in specifically.
They are also good for diversifying your portfolio and hedging against economic fluctuations.
The best international ETF for you is going to be the one that works best for YOUR unique portfolio.