Introduction
As an investor in the U.S., I know that diversification is crucial for long-term financial stability. While U.S. stocks dominate many portfolios, investing in international exchange-traded funds (ETFs) can enhance returns and reduce risk by adding exposure to foreign markets. Understanding the best international ETFs for diversified investing requires evaluating their structure, holdings, costs, and risk-reward dynamics.
Why Invest in International ETFs?
International ETFs provide exposure to global markets without the complexities of purchasing foreign stocks directly. They offer benefits such as diversification, currency hedging opportunities, and access to high-growth regions that might outperform U.S. markets in certain economic cycles.
Key Factors to Consider
When evaluating international ETFs, I focus on:
- Geographic Exposure: Developed vs. emerging markets.
- Sector Allocation: Technology, financials, consumer goods, etc.
- Expense Ratio: Lower fees mean higher net returns.
- Liquidity: Higher trading volumes provide better price execution.
- Currency Risk: Fluctuations in foreign exchange rates impact returns.
Top International ETFs for Diversified Investing
1. Vanguard Total International Stock ETF (VXUS)
- Expense Ratio: 0.07%
- Geographic Exposure: Broad exposure to developed and emerging markets
- Holdings: 7,000+ international stocks
- Why I Like It: VXUS provides one of the most comprehensive global portfolios at a very low cost. It covers nearly all investable stocks outside the U.S.
2. iShares MSCI Emerging Markets ETF (EEM)
- Expense Ratio: 0.68%
- Geographic Exposure: Emerging markets (China, India, Brazil, etc.)
- Holdings: Focus on technology and financial sectors
- Why I Like It: This ETF gives exposure to high-growth economies that may outpace the U.S. in the coming decades.
3. SPDR Portfolio Developed World ex-US ETF (SPDW)
- Expense Ratio: 0.04%
- Geographic Exposure: Developed markets outside the U.S.
- Holdings: 2,000+ companies from Europe, Japan, and Australia
- Why I Like It: It’s an excellent low-cost way to invest in stable, developed economies without U.S. exposure.
Comparison Table of Selected ETFs
| ETF Name | Expense Ratio | Geographic Focus | Number of Holdings | Key Sector Exposure |
|---|---|---|---|---|
| VXUS | 0.07% | Global (ex-US) | 7,000+ | Broad diversification |
| EEM | 0.68% | Emerging Markets | 1,200+ | Technology, Financials |
| SPDW | 0.04% | Developed Markets | 2,000+ | Industrials, Financials |
Historical Performance
Historical performance data shows that emerging markets can be highly volatile but often provide superior long-term returns compared to developed markets.
For example, over the past decade:
- The S&P 500 had an average annual return of 10%.
- The MSCI Emerging Markets Index returned 6.5% annually.
- The MSCI EAFE Index (developed markets) returned 5.2% annually.
How Currency Fluctuations Impact International ETFs
Investing in international ETFs exposes investors to currency risk. For example, if the U.S. dollar strengthens against foreign currencies, the value of international investments may decline in dollar terms. Some ETFs, like the iShares Currency Hedged MSCI EAFE ETF (HEFA), reduce this risk by using hedging strategies.
Example Calculation:
Assume you invest $10,000 in an international ETF denominated in euros. If the EUR/USD exchange rate drops from 1.10 to 1.05, your investment’s value in U.S. dollars decreases by approximately 4.5%, even if the ETF’s underlying stocks remain unchanged.
Final Thoughts
International ETFs provide an excellent way to diversify beyond U.S. stocks. By selecting the right ETFs based on costs, regional exposure, and currency risks, investors can build a balanced global portfolio. While emerging markets offer high growth potential, developed markets provide stability, and a well-balanced mix of both can enhance long-term returns.
