A Primer on International Investments
» International Opportunities
» Types of International Funds
» Different Approaches to International Asset Allocation
» Short- and Long-Term Performance of Foreign Stocks
» Tax Aspects of Foreign Investments
» Points to remember
International investments may offer investors opportunities to
diversify their portfolios while seeking to enhance returns.
Because foreign stock and bond markets can potentially move
independently from the U.S. financial markets — when domestic
stock prices are falling, other markets may be posting gains, for
example — U.S. investors may help reduce overall portfolio
risk by investing abroad. In addition, international investments
provide exposure to opportunities that U.S.-only investments
overlook, including some of the world’s largest
If you are investing for long-term goals that are 10 or more years
away, you may want to include international investments in your
portfolio. These investments carry more risks than domestic
investments, including currency risk and political risks, and less
liquidity. However, when combined with domestic investments in a
diversified portfolio, they may potentially help smooth out your
overall portfolio volatility. Before deciding whether international
investments are right for your goals and risk tolerance, you may
want to consult a financial professional.
Individuals may invest directly in stocks of foreign companies by
purchasing shares on a foreign stock exchange or by purchasing
American Depositary Receipts (ADRs) listed on U.S. exchanges.
Managed investments include global, regional, and country-specific
mutual funds, and, for high-net-worth investors, separately managed
Investing directly in foreign stocks poses several challenges.
Industry and company research on potential investments may not be
readily available to individuals. In addition, many foreign
companies do not follow U.S. accounting standards, making it more
difficult for investors to evaluate and compare company financial
statements. Direct investors may also need to commit substantial
funds in order to build a diversified international
Mutual funds offer professional management and, depending on the
fund’s objective, immediate diversification among companies in
many different countries or industries. In selecting individual
securities, fund portfolio managers may draw on the investment
firm’s proprietary in-house research as well as analysis
conducted by independent research firms. Portfolio managers may
also meet regularly with the management of companies that they
invest in as well as the firm’s customers and suppliers in
order to gather information about the company’s business
prospects and assess the strength of its management team.
Global funds invest in foreign and domestic markets, while
international funds invest only in developed foreign markets. Some
funds invest only in a single country or region of the world.
Emerging market funds focus on investments in smaller,
less-developed countries.1 Funds may also be defined by
investment style, such as index, growth, or value.
Unmanaged exchange-traded funds are another option for investors
seeking exposure to specific foreign markets. Traded on stock
exchanges such as the American Stock Exchange, some ETFs allow
investors to purchase shares representing a basket of stocks
included in a single country index.2 They offer low
transaction costs3, readily available pricing, and the
ability to trade on margin or to sell shares
|Types of International Funds|
|Source: Standard & Poor’s.|
Some diversified international mutual funds seek to invest in a
variety of national markets using the Morgan Stanley Capital
International EAFE index as a benchmark. Portfolio country
weightings may reflect those of the EAFE index, which are based on
each country’s total market capitalization. However, some
investment professionals believe that diversification may be
enhanced by allocating assets among different industry groups
around the world rather than just targeting individual countries:
for example, investing in pharmaceutical companies in different
What’s behind this approach? During the 1990s, the reduction
in trade barriers, the formation of the European Monetary Union,
and increasing globalization contributed to higher correlations
between price movements in different countries. Higher correlations
reduce potential diversification benefits. Therefore, some
strategists argue, it may potentially be beneficial to invest
across industry groups with lower correlations. However, keep in
mind that this is just one approach to international investing, and
it may not be right for every investor.
Earnings and capital gains on international investments are subject
to income taxes assessed by foreign governments as well as U.S.
income taxes. If you invest in international funds, you will
receive a statement showing the amount of foreign taxes paid on
your shares. The United States has tax treaties with many
individual countries, which may allow you to claim a credit on your
U.S. tax return for taxes paid abroad. If you invest directly in
foreign markets, you are responsible for meeting the tax filing
requirements in each country in which you invest. Be sure to
consult with tax and financial advisors about the suitability of
international investments for your portfolio.
- International investments carry higher risks, including
currency risk, political risk, and less liquidity. Combining
foreign and domestic investments in a portfolio may potentially
help lower volatility compared to a purely domestic portfolio.
- With many of the world’s largest companies located outside
of the U.S., international investments offer individuals unique
opportunities to invest in leading companies and industries.
- Individuals may invest directly in foreign markets or through
- Global funds include both foreign and U.S. securities.
International funds invest only in foreign securities. Emerging
market funds invest in companies in smaller, less-developed
1Emerging markets are generally more volatile than the
markets of more developed foreign nations, and therefore you should
consider this increased market risk carefully before investing.
Investors in international securities may be subject to higher
taxation and higher currency risk, as well as less liquidity,
compared with investors in domestic securities. Returns are in U.S.
dollars and reflect effects of currency fluctuations.
2ETF prices change throughout the trading day, and the
investor may not be able to realize a quoted price. Purchase and
sale of ETF shares may involve brokerage trading commissions. These
commissions are not typically included in the ETF expense
calculations. Returns reported on ETF investments do not reflect
the impact of any brokerage commissions incurred in the purchase or
sale of ETF shares.
3The frequent trading of ETFs could significantly
increase costs such that they may offset any savings from low fees
4You can lose more funds than you deposit in the margin
account. The firm can force the sale of securities or other assets
in your account(s). The firm can sell your securities or other
assets without contacting you. You are not entitled to choose which
securities or other assets in your account(s) are liquidated or
sold to meet a margin call. The firm can increase its
“house” maintenance margin requirements at any time and
is not required to provide you advance written notice. You are not
entitled to an extension of time on a margin call. “Short
selling” is a strategy that involves selling something that
you do not already own. Short selling is extremely risky. Be
cautious of claims of large profits from short selling. Short
selling requires knowledge of securities markets; requires
knowledge of a firm’s operations; and may result in your
paying larger commissions. Short selling on margin may result in
losses beyond your initial investment.
5Diversification does not ensure against loss.
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