DEFINITION of 'International Portfolio'

An international portfolio is a grouping of investment assets that focuses on securities from foreign markets rather than domestic ones. An international portfolio is designed to give the investor exposure to growth in emerging and developed markets and provide diversification.

BREAKING DOWN 'International Portfolio'

An International portfolio allows investors to further diversify their assets by moving away from a domestic-only portfolio. This type of portfolio can carry an increased risk due to potential economic and political instability stemming from emerging markets, but can also bring increased stability through investments in industrialized and more stable markets. The most cost-effective way for investors to hold an international portfolio is to buy an exchange-traded fund (ETF) that focuses on foreign equities, such as the Vanguard FTSE Developed Markets ETF.

International Portfolio Advantages

  • Helps Reduce Risk: Having an international portfolio can be used to reduce investment risk. If U.S. stocks underperform, gains in the investor’s international portfolio can smooth out returns. For example, an investor’s domestic portfolio may have declined by 10%; meanwhile, their international portfolio could have advanced 20%, leaving the investor with a net investment return of 10%. Risk can be reduced further by investors holding a selection of stocks from developed and emerging markets in their international portfolio.                                                                                                                                                                                                           
  • Diversifies Currency Exposure: When investors buy stocks for their international portfolio, they are also effectively buying the currency in which the stock is quoted. For example, if an investor purchases a stock on the London Stock Exchange, they are also buying the Great British Pound. If the U.S. dollar falls, the investor's international portfolio helps to neutralize currency fluctuations. (To learn how to hedge an international portfolio with a currency ETF, see: Hedge Against Exchange Rate Risk with Currency ETFs.)                                                                                                                                                                                                                                                                 
  • Market Cycle Timing: Investors who have an international portfolio can take advantage of the market cycles of different nations. For instance, an investor may believe U.S. stocks and the U.S. dollar are overvalued and look for investment opportunities in developing countries, such as Latin America and China that they think should benefit from capital inflow and demand for commodities.

International Portfolio Limitations

  • Political and Economic Risk: Many developing countries do not have the same level of political and economic stability as the United States. This may increase volatility to a level that risk-averse investors don't feel they can tolerate. For example, a political coup in a developing country may result in its stock market declining by 40%.                                                                                                              
  • Increased Transaction Costs: Investors typically pay more in commission and brokerage charges when they buy and sell international stocks which reduces their international portfolio’s overall return. Taxes, stamp duties, levies and exchange fees may also need to be paid, which dilute gains further. Many of these costs can be significantly reduced or eliminated by gaining exposure to an international portfolio using ETF’s or mutual funds.
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