What Is an International ETF?
An international exchange traded fund (ETF) is any ETF that invests specifically in foreign-based securities. The focus may be global, regional, or on a specific country and may hold equities or fixed income securities.
- International ETF is an exchange traded fund that specializes in foreign securities.
- An international ETF may track global markets, or track a country-specific benchmark index.
- ETFs that invest in less developed country stocks or bonds are known as emerging markets or frontier markets ETFs.
- Investors can use these ETFs to diversify the geographic and political risks associated with their portfolios.
An Introduction To Exchange-Traded Funds (ETFs)
Understanding International ETFs
International ETFs are typically invested passively around an underlying benchmark index, but the index may vary substantially from one fund manager to the next. Some funds, especially those with a wide global footprint or those that invest in countries with advanced economies, can provide strong diversification by investing in hundreds of companies.
ETFs that invest in a single foreign country may carry higher risks than international ETFs that spread their investments among many countries. If a single country undergoes a major recession or other financial hardship, an ETF that only invests in securities based there could have a major performance shortfall. International ETFs are increasingly polular for U.S. investors amid strong global growth. Advances in globalization and financial regulation have opened more financial markets to outside investment. In general, expense ratios for international ETFs tend to be higher than the averages because of the higher costs to invest abroad.
Emerging Market ETFs
For U.S. investors, international funds can include developed, emerging or frontier market investments in a range of asset classes. These funds can offer varying levels of risk and return. In addition to country-specific considerations, international funds managed to various asset classes. Debt and equity funds are the two most common, providing a broad universe for investment. U.S. investors seeking to take more conservative positions can invest in government or corporate debt offerings. Equity funds offer diversified portfolios of stock investments that can be managed to a variety of objectives. Asset allocation funds offering a mix of debt and equity can provide for more balanced investments with the opportunity to invest in targeted regions of the world.
Example: The Vanguard Total International Stock ETF
The Vanguard Total International Stock ETF (NASDAQ: VXUS) was launched in 2011 and invests in global stocks, excluding U.S. stocks. Since its inception, VXUS has earned investors an annualized return of around 4% by tracking the performance of global company stocks listed on the FTSE Global All Cap ex-U.S. Index. The target benchmark index follows large-, mid- and small-cap equities of companies operating outside the United States.
The international equities held within VXUS provide investors with a unique opportunity to diversify a portfolio in both developed and emerging markets around the world. The stock movement of companies based overseas does not always have a direct correlation to domestic stock prices, providing investors an opportunity to take advantage of market movements that may differ from shifts in U.S. equity markets.
The Vanguard Total International Stock ETF invests at least 95% of all fund assets in an attempt to mimic the performance of the FTSE Global All Cap ex U.S. Index. VXUS is most heavily weighted in Europe, with 42.5% invested in the region, followed by 29.6% in the Pacific, 20.6% in emerging markets and 6.6% in North America. Top holdings follow suit with the fund's target index, including Royal Dutch Shell, Nestlé, Tencent Holdings and Samsung Electronics.