When it comes to investing in international ETFs it can feel like you are adding a safety net to your portfolio. Why? Different economies don’t always move in the same way. During times when domestic markets are a bit shaky, international ETFs could be the stability or growth needed to make up the difference. For example, during the 2008 financial crisis, while mutual funds lost massive $570 billion in inflows, ETFs still saw $74 billion in inflows. And that’s the power of diversification.
Now, let’s talk about currency. Now imagine your domestic currency is weaker and that is not good for your local investment. However, if you hold international ETFs in stronger foreign currencies, those investments will actually have value when converted back. This is a natural hedge that will protect your overall returns from the volatility of domestic currency.
Why International ETFs Make Sense
- Risk Reduction: Spreading investments across countries protects against economic downturns, political instability, or other localized risks.
- Currency Diversification: If your domestic currency weakens, foreign investments in stronger currencies can offset those losses.
- Market Cycles: When one market slows down, others might be gearing up for growth.
Another big advantage of this is that you can tap into global trends. Every market has its market cycle. One economy may be slowing, another could be about to boom. International ETFs offer the opportunity to participate in these growth opportunities without anchoring your time, nor your performance, to a single country.
Portfolio allocation to international ETF matters to make the most of them. Experts suggest that you should set aside 20-40% of your portfolio to international stocks. The key is balance. Stability is on offer in the developed markets, accompanied by higher potential for growth in emerging markets, albeit at increased risk. You can get the best of both worlds with a mix of the two. If you’re looking for sector-specific international ETFs you could also look at investing in industries such as technology or healthcare that are booming in some areas.
However, international ETFs aren’t without risk. Your returns can swing either way with currency fluctuations. If you’re investing in emerging markets, liquidity may be an issue as these markets tend to have lower trading volumes than in developed markets.
The risks involved notwithstanding, the numbers argue strongly in favor of international diversification. Research indicates that equity ETFs are 2.5 times more sensitive to global conditions than mutual funds, and they are a highly efficient means of gaining exposure to international markets. For example, Vanguard’s Total International Stock ETF (VXUS) has returned an annualized 5% since 2011, righting the ship with global diversification.
International ETFs’ give you access to the world – in a simple way, allowing you to spread your investments to reduce local risks while tapping into global opportunities. It’s like giving your portfolio a chance to just thrive no matter what’s going on.