Investing in international stock funds is made simple for investors by these exchange-traded funds (ETFs) and mutual funds.
Many well-known automobile, consumer electronics, and industrial companies with significant U.S. presences can be found on the Japanese stock market.
The U.S. stock market, especially the S&P 500, has witnessed a strong trailing year of outperformance, which is a draw for investors seeking to diversify their portfolios. Largely responsible for this accomplishment are a select few mega-cap stocks in the communication and technology sectors. But on a worldwide scale, the S&P 500’s outstanding performance wasn’t unrivalled.
Surprisingly, a dark horse emerged from Japan, where the benchmark Nikkei 225 Index outperformed the S&P 500 during the trailing year, climbing 34.5% in price against the S&P 500’s 22.9% return. This occurred on February 9, 2023, to February 9, 2024.
In doing so, the Nikkei 225 Index was able to end a prolonged period of stagnation that lasted for more than ten years and started in December 1989. This astounding recovery demonstrates the potential that exists outside of the US market. But this performance is more important than just the stats. It emphasises a crucial lesson for investors: Strictly concentrating on assets based in the United States may result in lost possibilities.
According to Kirk Kinder, founder and president of Picket Fence Financial, “the ex-U.S. market makes up about 40% to 45% of the world’s market capitalization, so investors are missing out on roughly half the world’s investing opportunities by ignoring international stocks.” “Moreover, international stocks are substantially undervalued when you look at metrics like price-to-earnings and price-to-book ratios.”
From developed countries like Germany, France, and Switzerland to growing markets like Brazil, India, and China, the global market is bursting at the seams with opportunity. These areas provide both diversification and the potential for significant profits.
Chief investment officer at Saturna Capital Scott Klimo says, “Adding international stocks to your portfolio can dampen volatility and improve returns, since the U.S. economy and market may face challenges at different times compared to international regions.” “Mitigating currency risk also plays a role, as the U.S. dollar may strengthen or weaken versus other countries at different times.”
ETFs and mutual funds offer a convenient and cost-effective way for investors to broaden their investment horizons without having to deal with the intricacies of currency conversion or understanding American depositary receipts (ADRs).
With just one ticker symbol, these investment vehicles provide transparency, liquidity, and diversification. They also give investors a wide range of options, from funds that concentrate on particular nations to those that target particular industries within a nation.
The top seven foreign stock funds to purchase in 2024 are as follows:
| FUND | EXPENSE RATIO |
| Vanguard Total International Stock ETF (ticker: VXUS) | 0.07% |
| iShares Core MSCI EAFE ETF (IEFA) | 0.07% |
| iShares Core MSCI Emerging Markets ETF (IEMG) | 0.09% |
| Franklin FTSE Japan ETF (FJPN) | 0.09% |
| KraneShares CSI China Internet ETF (KWEB) | 0.69% |
| Dimensional International Small Cap Value Portfolio (DISVX) | 0.44% |
| Fidelity Zero International Index Fund (FZILX) | 0% |
1. Vanguard Total International Stock ETF (VXUS)
Using an ETF with a broad market index, such as VXUS, is one of the most affordable and diversified ways to invest in foreign stocks. This exchange-traded fund (ETF) tracks the FTSE Global All Cap ex U.S. Index passively. The index now comprises over 8,500 market-cap-weighted stocks from established and emerging market nations. It trades at about $57 per share and has a low expense ratio of 0.07%.
Currently, market capitalization weighting of holdings leads to an overweighting of European and Pacific market shares at approximately 40% and 27%, respectively. About 25% of the portfolio is dedicated to emerging markets, with about 7% going towards North American equities because the Canadian market is included.
2. iShares Core MSCI EAFE ETF (IEFA)
By tracking the MSCI EAFE IMI Index, IEFA allows investors to concentrate just on international developed equities. The index’s abbreviations, “EAFE” for “Europe, Australasia and the Far East” and “IMI” for “investable market index,” denote that in addition to large-cap equities, it also includes small- and mid-cap firms. The cost ratio of the ETF is 0.07%.
Several of the companies that make up IEFA’s top holdings are likely well-known to American investors, as many of them have significant operations and strong brand recognition in the country. Nestle SA (NESN.SW), LVMH (MC.PA), Toyota Motor Corp. (7203.T), and Shell PLC (SHEL) are a few notable names. With more than $107 billion in assets under administration, or AUM, IEFA is an extremely well-liked organisation.
3. iShares Core MSCI Emerging Markets ETF (IEMG)
IEMG, which follows the MSCI Emerging Markets IMI Net Index, is the equivalent of IEFA. The majority of the stocks in this exchange-traded fund are from nations that are rapidly industrialising and expanding their economies, including China, India, Taiwan, South Korea, Brazil, Saudi Arabia, South Africa, Mexico, and more. With a current three-year standard deviation of 17.5%, it is a fairly volatile and risky ETF.
Emerging market exchange-traded funds (ETFs) such as IEMG have underperformed their developed and U.S. equivalents during the past few years. IEMG’s return for the last ten years, ending December 31, 2023, was only an annualised 2.9% when dividends were reinvested. Nevertheless, the ETF’s valuation metrics—a 12.7 price-to-earnings ratio and a 1.76 price-to-book ratio—appear to be somewhat low.
Also read: Top ETFs to Buy Right Now 2024
4. Franklin FTSE Japan ETF (FJPN)
Many well-known automobile, consumer electronics, and industrial companies with significant U.S. presences can be found on the Japanese stock market. An ETF that tracks the FTSE Japan Capped Index, FJPN, is a nation-specific option for investors who want to wager on the continuation of the market momentum in Japan. This ETF’s passive indexing approach allows it to attain a relatively low expense ratio of 0.09%.
There are now just over 500 market-cap-weighted Japanese stocks in FJPN. Its index is “capped,” which indicates that the maximum weight that may be allocated to a single stock is fixed. By guaranteeing that no single stock can account for more than 20% of the index’s weight, this reduces the risk of concentration. With a 30-day median bid-ask spread of just 0.03%, FJPN is likewise extremely liquid.
5. KraneShares CSI China Internet ETF (KWEB)
Investing in individual industries allows investors to go even farther for even more specialised exposure to a single nation. For instance, through the CSI Overseas China Internet Index, one of the most well-known Chinese equity funds, KWEB, only invests in Chinese internet technology businesses, such as Tencent Holdings Ltd. (0700.HK), Alibaba Group Holdings Ltd. (9988.HK), and Baidu Inc. (9888.HK).
“There is a’severe’ difference in valuation between American and Chinese internet companies,” says Brendan Ahern, chief investment officer of KraneShares. “One could purchase all 31 companies in KWEB with the market cap of either Amazon.com Inc. (AMZN) or Alphabet Inc. (GOOG, GOOGL) and still have $140 billion-plus left over,” Ahern claims. KWEB levies an expense ratio of 0.69%.
6. Dimensional International Small Cap Value Portfolio (DISVX)
International equity funds that are weighted according to market capitalization provide larger stocks a higher weight in percentage. Although this strategy is efficient and has low expenses, it may increase the risk of concentration if a small number of companies become to dominate the index. Targeting particular elements, which are possible outperformance drivers and have been shown to drive long-term stock returns empirically, is an alternate strategy.
DISVX, which focuses on foreign small-cap value stocks with strong profitability, is an excellent example. According to Mary Phillips, deputy head of portfolio management, North America, at Dimensional Fund Advisors, “looking at average annualised returns going back decades, small-cap stocks have beaten large caps, value has outperformed growth, and high-profitability stocks have out-gained low profitability stocks.”
7. Fidelity Zero International Index Fund (FZILX)
Investing abroad need not result in greater expense ratios. Investors on the Fidelity trading platform that are on a tight budget can access FZILX, which is a tracking version of the company’s own Fidelity Global ex U.S. Index. Because it has no cost ratio, no minimum initial investment requirement, no transaction fees, and no sales loads, Fidelity consumers can invest in this mutual fund for free.
At around 75% and 25%, respectively, of the more than 2,200 equities in the FZILX-tracked index come from developed and emerging economies, offering extensive diversity. With dividends reinvested, this portfolio has returned 5.6% annually over the last five years. Since the fund only made its debut in August 2018, a more extensive performance history is currently unavailable.
Things to consider before investing in International Stocks
Currency risk: Recognise that foreign exchange rate swings may affect international stock funds and have an effect on returns when converted back to your home currency.
Political and economic stability: Because instability can impact investment returns, find out about the political and economic stability of the nations in which international stock funds invest.
Regulatory framework: Take into account the regulatory framework in international markets, taking into account variations in company governance, investor rights, and accounting standards.
Geopolitical risks: Evaluate potential effects on global markets and stock fund performance, such as trade disputes, hostilities, or sanctions.
Diversification benefits: Gain exposure to a variety of countries, markets, and industries by investing in foreign stock funds. This will help you recognise the possible advantages of diversity.
Investment plan: Assess how well the foreign stock funds’ investment strategy fits your time horizon, risk tolerance, and investing objectives.
Fees and expenses: Consider management fees, transaction charges, and currency conversion fees when assessing the costs and fees related to investing in foreign stock funds.
