International ETFs: Your Gateway to Global Diversification

What are International ETFs?

As we’ve covered in this series, ETFs are investment funds traded on stock exchanges. They typically track an index, sector, commodity, or basket of assets. While domestic ETFs focus on local markets, international ETFs provide exposure to companies and economies around the globe.

How Do International ETFs Differ?

International ETFs differ primarily by focusing on non-domestic (non-U.S.) markets:

• Developed Markets: Funds that target stable economies like those in Europe, Japan, Australia, or Canada.
• Emerging Markets: Funds concentrating on high-growth potential economies, albeit with higher volatility, such as those in Asia, Latin America, or Africa.
• Regional & Country-Specific Funds: Options that allow investors to concentrate on a specific region (e.g., Europe) or country (e.g., India).

Why Invest in International ETFs?

Diversification Benefits

International ETFs help spread risk by reducing exposure to any economic or political system. By adding global assets, your portfolio is better shielded from country-specific downturns.

Growth Potential

Emerging markets often exhibit rapid economic growth. Investing in these regions through ETFs can capture some upside from burgeoning consumer bases and dynamic industries.

Currency and Economic Cycles

Investing abroad means dealing with multiple currencies. While this introduces currency risk, it can also provide a hedge against domestic market fluctuations since different economies and exchange rates often do not move in lockstep.

Complementing a Domestic Portfolio

International ETFs provide a counterbalance to domestic investments. They allow investors to capture trends and growth in regions not represented in local indices.

Evaluating International ETFs

Research Essentials

Before investing in a particular international ETF, consider the following:

• Expense Ratios: Lower fees can enhance long-term returns. This is a good rule of thumb when investing in general.
• Tracking Error: Ensure the ETF closely follows its benchmark. If the fund is not managed properly or has low liquidity, your return may not match the underlying benchmark it’s meant to track.
• Liquidity: Higher trading volumes typically indicate easier entry and exit. When liquidity is low, there can be gaps between the price someone is willing to sell, also called the ask, and the price someone is willing to buy, called the bid. This gap is known as the spread. In low liquidity markets, the spread, in fiat, can represent around 1% of the overall price or even higher in after-hours trading. Limit price orders can help in these situations, which we will discuss in a future article.

Performance & Historical Context

While past performance does not indicate future results, historical data can help gauge an ETF’s stability and resilience. Look at how the fund has navigated market volatility and economic shifts.

The chart below illustrates the percent return of a few international ETFs against the S&P 500 from Jan 1, 2010 to Feb 6, 2025. It goes without saying – “don’t bet against America” – Warren Buffet

However, this isn’t always the case. The chart below illustrates the same ETFs from Jan 1, 2000, to Feb 6, 2025. You’ll notice that emerging markets had roughly 14 years of outperformance relative to the S&P 500 from 2004 to 2018, albeit a sideways trade for many of those years post 2010.

Risks and Considerations

Market Risks

International markets are sensitive to the same factors that play into domestic markets: politics, internal strife, reform, deficits, diplomacy, trade wars, actual wars, etc. When Russia invaded Ukraine, the international community imposed financial sanctions and cut off trade. ETFs tracking Russia lost 99% of their value over a couple of days. Understanding the risks of investing in only one country, especially one at odds with U.S. foreign policy, is imperative.

Currency Exchange Rates

You will also have to factor in the exchange rate of currencies — for example, a stronger dollar essentially depreciates the world’s other currencies, making trade less feasible.

Regulatory and Transparency Issues

Different countries have varying financial reporting and regulatory oversight standards, which can sometimes pose challenges in assessing risk and performance.

Risk Mitigation Strategies

• Diversification: Spread your investments across various regions and asset classes.
• Periodic Reviews: Regularly assess your portfolio to ensure it aligns with your long-term goals.
• Balanced Approach: Combine international ETFs with domestic investments to smooth out volatility.

“Investing is not about timing the market, but time in the market. Diversification is the strategy that transforms risk into opportunity.“

Sample International ETFs

The ETFs listed above are just a small sample. There are many hundreds more international ETFs. Take a look at VettaFi’s ETF Database here.

Final Thoughts

International ETFs offer a compelling way to diversify your portfolio and tap into global growth. While there are risks—including market volatility and currency fluctuations—the benefits of broad exposure often outweigh the downsides for many investors. Due diligence, accompanied by measured research, can help tailor your strategy to your unique goals.

Share your thoughts or questions in the comments below—we’d love to hear what international ETFs you have in your portfolio! VEA, VWO, and KWEB appeared in our 2023 Plebdex. KWEB was also featured in our 2024 Plebdex.

Stay tuned for next week’s post, in which we’ll explore the world of commodity ETFs, how they can act as hedges, and offer unique diversification opportunities in today’s fluctuating, inflationary markets!