Are you interested in investing in foreign markets, but not sure where to start? Well, this article is going to demystify the process, covering the pros and cons of doing so, and the specific investments (with Schaub, Fidelity, and Vanguard) that you should consider.
But first, let’s establish what it means to invest in foreign markets. This article refers to buying stocks, bonds, mutual funds, or any other asset in non-US companies. By “foreign market” this means any companies that are not on the US stock market.
Benefits And Disadvantages of Foreign Investment
There are a number of pros and cons to foreign investment that you should know before you enter the market. Let’s begin with the benefits:
Global diversification. By investing in foreign markets you have global diversification, which means that certain events that specifically impact the US market will not affect all of your investments.
Expanding opportunities. The US is not the be-all and end-all, and by putting all of your money in US markets you may be missing out on opportunities to invest in new technology and emerging economies.
Potential growth. You may find an opportunity to get your foot in the door before other investors, and before an asset becomes saturated or overvalued, meaning you can reap greater benefits. This is particularly true in smaller countries that still have plenty of room for growth.
Some drawbacks of foreign investing can include:
Risk: While there is potential growth in foreign investments, there is an equal potential risk, just as there is investing in the US-based market.
Research limitations. Whenever you invest in a company you want to understand their financials: how they are performing, profit margins, losses, etc. But when you invest in foreign companies there are more limits on their transparency, as some foreign companies don’t have to report their financials to the same standard as US companies, which can make research difficult.
Currency exchange rate. Naturally, foreign companies generate capital based on their local currency. And if you invest in these companies, at some point you are going to have to convert this investment into your currency. Depending on the exchange rate, you may see significant losses.
Emerging markets can be volatile and unpredictable. One thing to keep in mind when investing in foreign markets is the knowledge that you are taking on more risk due to the volatility of these markets.
Should You Invest In The S&P 500?
When it comes to the topic of foreign investment, some people wonder if they can simply invest in the S&P 500 to gain that global diversification, since the S&P has a lot of international reach. While it does give some international exposure, it isn’t to the same extent as investing solely in foreign markets.
This is because the international companies in the S&P are already established, rather than emerging companies. There is a higher chance that they are overvalued or oversaturated, and will not give you those same pros that sole foreign investment will.
Foreign Investments With Fidelity, Vanguard, And Schaub
It can be tricky to know where to start with foreign markets if you’ve only invested in US companies. So these are different types of investments that will be worth looking into, to see if they fit your investment portfolio.
Fidelity Zero International Index Fund (FZILX):
Expense ratio: 0%
This index fund invests in foreign developed and emerging stock markets, including non-US large and mid-cap stocks. Their top 5 holdings include:
10 Cent Holdings
Fidelity International Index Fund (FSPSX)
Expense ratio: 0.35%
The FSPSX tracks the total return of foreign stock markets based on the Morgan Stanley International (Europe, Australasia, Far East) Index. Its top 4 holdings include:
ASML Holding, a manufacturer of chip-making equipment
Roche Holdings, a pharmaceutical company
LVMH (Moet Henessy Louis Vuitton)
Novartis AG, another pharmaceutical company
Vanguard FTSE ETF (VEA)
Expense ratio: 0.05%
This ETF invests in large, mid, and small-cap companies in Canada, Europe, and the Pacific region. Its top 5 holdings are:
Vanguard Total International Stock ETF (VXUS)
Expense ratio: 0.08%
This ETF invests in small, mid, and large-cap companies in developed and emerging non-US markets. Its top 5 holdings are:
Taiwan Semiconductor Manufacturing
Schwab International Index Fund (SWISX)
Expense ratio: 0.06%
This index fund invests in large non-US companies from countries with developed markets. Its top 5 holdings are:
These are just five ways you can consider investing in foreign markets. But there are plenty of options to choose from, which is why it's worth looking into all of the non-US index funds, ETFs, and individual stocks that you can find. The options are endless, and you may find that investing in a foreign market can help to grow your portfolio in some meaningful ways.