How to invest globally through ETFs: An ultimate guide

Investing in exchange-traded funds (ETFs) offers a simple method to diversify portfolios by gaining exposure to multiple securities through a single fund. Opting for ETFs that span various global markets enhances diversification further. While global investing presents opportunities for substantial growth, it's essential to assess associated risks carefully.

Global investment simplified with ETFs

Regardless of your location, familiarity with your country's businesses and stock markets is common. For instance, Americans typically invest in domestic companies listed on exchanges like the New York Stock Exchange.

However, with numerous global markets available, some investors seek exposure to foreign companies and assets, which can be complex and costly. ETFs simplify global investing by trading on US exchanges while holding shares in foreign companies. This accessibility allows investors to easily access foreign markets, including emerging markets with potential growth opportunities.

Considerations for global investing

When venturing into global investments, it's crucial to evaluate similar risks as with domestic investments. Researching funds thoroughly is essential to grasp their objectives, fees, and risk-reward potential.

However, global investing introduces additional considerations. Currency fluctuations can significantly impact investment performance; for instance, a weakened yen versus the dollar can diminish returns. Geopolitical factors also pose risks, as demonstrated by the fallout from events like the 2022 Russian invasion of Ukraine, affecting investments in Russian-focused ETFs like the iShares MSCI Russia ETF (ERUS).

Navigating global markets demands careful assessment of these factors to make informed investment decisions.

Choosing global ETFs: A guide to selecting investments

Several options exist, such as the Vanguard Total World Stock ETF (VT), which includes both American and foreign stocks, providing broad exposure to global markets. Over the past decade, VT has delivered an annualized return of 8.07%, slightly below its benchmark.

Alternatively, the iShares MSCI ACWI ex U.S. ETF (ACWX) focuses solely on non-American companies, appealing to investors seeking international diversification. ACWX has shown an annualized return of 3.70% over the same period, influenced by the relative strength of U.S. versus international markets.

For those interested in specific countries, funds like the WisdomTree Japan Hedged Equity Fund (DXJ) concentrate on particular markets, employing hedging strategies to manage currency risks. DXJ has achieved a 10-year return of 9.97%.

Choosing a global ETF involves market research to determine whether broad exposure or specific regional focus suits your goals. Consider factors like expense ratios, index tracking accuracy, and liquidity, akin to domestic ETF investments.

Understanding global ETF holdings: Key considerations

When evaluating global ETFs, it's essential to comprehend their holdings. Determine if the fund focuses on specific countries or tracks major indices like the Nikkei 225 or Hang Seng, assessing its tracking error for alignment with the index’s performance.

Examining the index a fund tracks is crucial—whether it encompasses large-cap firms akin to the Dow Jones Industrial Average or offers a broader perspective like the S&P 500 of a country’s large companies. This distinction is vital due to differing performance dynamics between large and small-cap companies in foreign markets.

Review the ETF’s holdings to grasp its portfolio composition and weighting strategy. Additionally, check if the fund uses derivatives for currency hedging, which can mitigate currency risks but typically involves additional expenses.

Investing in global ETFs: Strategies and considerations

Investing in global ETFs offers several approaches. One common strategy is using total market funds like VT for broad exposure to both domestic and international markets, weighted by market capitalization. This provides significant exposure to the largest market, the U.S., alongside other global markets.

Alternatively, some investors prefer targeting specific countries or regions. For instance, focusing on emerging economies like Brazil for potential growth opportunities.

Diversification remains crucial in global investing to mitigate risks. While investing solely in one country poses higher risks, spreading investments across multiple countries or using diversified ETFs can help manage such risks.

Once you’ve settled on your investment strategy, choosing suitable global ETFs and executing buy orders allows you to begin your investment journey effectively.

Challenges and risks of investing in global ETFs

Investing in global ETFs entails risks similar to domestic funds, such as market volatility, but presents unique challenges.

For instance, as an American investor, familiarity with foreign markets and their operations is limited compared to domestic ones. This necessitates extensive research into investment options abroad.

Regulatory risks also loom, with potential government restrictions on foreign stock trading and local regulations impacting investment values. Inadequate regulatory oversight in foreign markets increases fraud risks that could affect investments.

Currency fluctuations pose additional risks, potentially devaluing investments unless ETFs employ hedging strategies.

To mitigate these risks, diversifying portfolios across countries and conducting thorough research on prospective investments are essential strategies.

Tax considerations for investors in global ETFs

Investing in global ETFs introduces tax complexities, as the U.S. taxes profits from foreign investments alongside local tax laws. Utilizing ETFs can simplify tax management, benefiting from foreign tax credits and bilateral tax treaties to reduce double taxation. Despite ETFs reclaiming some foreign taxes, investors are still liable to the IRS for capital gains and dividends. Holding investments long-term can lower tax rates, and tax-advantaged accounts like IRAs or 401(k)s offer further tax benefits, especially with income-generating ETFs.

Examples of successful investments in global ETFs

Investing in global ETFs has proven highly profitable for many.

For instance, over a one-year period from January 18, 2023, the Franklin FTSE Taiwan ETF (FLTW), focused on Taiwan's market, delivered a 30.10% return, outperforming the Vanguard S&P 500 ETF (VOO), which returned 26.33%.

This success can be attributed partly to Taiwan Semiconductor Manufacturing Co. (TSM), which saw its stock price surge approximately 200% over five years.

Successful global investors identify undervalued markets and sectors poised for significant growth, such as foreseeing Taiwan's semiconductor industry's rise years ago due to its dominant global position.

Alternative methods for international investing

Investors seeking global market exposure have several options beyond ETFs. They can trade American depositary receipts (ADRs), which allow foreign companies to access U.S. markets, buy foreign stocks over-the-counter, or trade directly on foreign exchanges.

What sets apart emerging and frontier markets?

Emerging and frontier markets both refer to smaller, less-developed countries. Emerging markets, like India, Mexico, or Saudi Arabia, are typically more economically developed than frontier markets, which are considered less developed and thus carry higher risk.

Which are the top emerging market ETFs?

Finding suitable ETFs requires thorough research. Some popular choices for emerging market ETFs include the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI BIC ETF (BKF).