If you’ve been learning about investing, you’d know about the importance of diversification. Investing beyond your home country is one of the most common ways to diversify your portfolio.
And an easy way to own foreign stocks without having to do much research, is through international ETFs.
Here, I give you a quick introduction to International ETFs, why they deserve a spot in your portfolio and share some popular options to help you get started.
What are International ETFs?
International ETFs provide exposure to companies outside of your home country. They allow us to invest in international equity markets, providing diversification to a portfolio that is predominantly invested in the domestic equity market.
International ETFs can be broad-based, providing exposure to entire regions or countries, or more targeted, providing exposure to specific sectors, industries, or themes.
p.s. if you’re new to ETFs, read our Beginner’s guide to investing in ETFs
Why should you include International ETFs in your portfolio?
Here’s why you should consider investing in international ETFs:
Diversification
Investing in international ETFs can provide diversification benefits, as international markets may be less correlated with domestic markets. This can help to reduce portfolio risk and volatility.
Growth potential
International ETFs can provide access to companies that may have higher growth potential than domestic companies. Emerging markets, in particular, can offer higher potential returns due to their growing economies and expanding middle class.
Currency exposure
Investing in international ETFs can provide exposure to different currencies, which can offer potential benefits in terms of currency diversification and potentially higher returns.
However, currency exposure can also introduce additional risks and volatility.
Best International ETFs
It is difficult to define the best international ETFs – we could look for the most globally diversified ETFs if you’re optimizing for diversification, we could also look for the largest international ETFs if you prefer to hold highly liquid ETFs. You get the picture, defining the ‘best international ETFs’ would be entirely up to your investing goals.
So, I’ll focus on International ETFs with the largest Assets Under Management (AUM), which would suggest that they are the most liquid and popular options.
Based on that definition, here’re the best international ETFs, data updated as of 7 Mar 2024:
| Vanguard FTSE Developed Markets ETF (VEA) | iShares Core MSCI EAFE ETF (IEFA) | Vanguard FTSE Emerging Markets ETF (VWO) | |
|---|---|---|---|
| AUM | $121.7B | $112.7B | $97.9B |
| Expense Ratio | 0.05% | 0.07% | 0.08% |
| Investment Objective | Broad based ETF focusing on developed markets outside of US | Broad based ETF focusing on developed markets, outside of US and Canada | Broad based ETF focusing on emerging markets |
| No. of holdings | 4034 | 2834 | 5781 |
| Top 5 holdings | 1) Novo Nordisk A/S (NOVO B) 2) ASML Holding (ASML) 3) Nestle (NESN) 4) Samsung Electronics (005930) 5) Toyota Motor Corp. (7203) | 1) Novo Nordisk A/S (NOVO B) 2) ASML Holding (ASML) 3) Nestle (NESN) 4) Toyota Motor Corp. (7203) 5) LVMH (MC) | 1) Taiwan Semiconductor Manufacturing Co (2330) 2) Tencent Holdings (700) 3) Alibaba Group (9988) 4) Reliance Industries (RELIANCE) 5) HDFC Bank (HDFCBANK) |
Both VEA and IEFA are pretty similar in their holdings, however the latter charges a slightly higher fee which could be the reason why its AUM is smaller.
Developed markets vs Emerging Markets
Developed markets (covered by VEA and IEFA) and emerging markets (covered by VWO) offer different investment advantages.
Here’s how “developed markets” and “emerging markets” differ:
Developed markets refer to countries that have well-established economies, financial markets, and infrastructure, and are generally considered to be more stable and mature. These countries tend to have a high GDP per capita, advanced industrialization, and a high standard of living. Examples of developed markets include the United States, Canada, Japan, and many European countries.
Emerging markets, on the other hand, refer to countries that are in the process of developing their economies and financial systems. These countries typically have lower levels of industrialization, infrastructure, and per capita income than developed markets. Examples of emerging markets include China, Brazil, India, and Russia.
Investing in developed markets can offer potentially lower risks and more stable returns, while investing in emerging markets can offer higher potential returns but also comes with higher risks due to political instability, currency risks, and other factors.
In a nutshell, emerging markets are generally deemed as more risky investments which come with higher potential returns. You should take that into consideration when selecting an international ETF for your portfolio.
Is it smart to invest in international ETFs?
Picking winning stocks is a difficult challenge even when we are familiar with the companies that are listed in the S&P 500. It would be even more challenging when we try to find winning stocks internationally. This is especially true when faced with unfamiliar companies operating in unfamiliar markets.
International ETFs help to solve this issue by allowing us to invest in a basket of international stocks without having to understand the intricacies of various foreign markets.
Would you be diversifying your portfolio with international ETFs? Let me know your thoughts below!
If you prefer to own the world with a single ETF, read about the Best World ETFs here!
