International ETFs
What Are International ETFs?
International ETFs are exchange-traded funds that invest in the equities or debt of companies and governments located outside the investor's home country.
International ETFs (Exchange-Traded Funds) are investment vehicles that trade on domestic stock exchanges but hold assets from foreign countries. For a US investor, an international ETF might track an index like the MSCI EAFE (Europe, Australasia, Far East) or the FTSE Emerging Markets index. These funds allow investors to buy a diversified basket of foreign stocks or bonds as easily as buying a single share of a US company. They are a primary tool for achieving international diversification. Instead of researching and buying individual foreign stocks—which can be costly and complex—an investor can purchase an ETF that instantly provides exposure to hundreds or thousands of companies across the globe. International ETFs are categorized in various ways. **Developed Market ETFs** focus on established economies like the UK, Japan, and France. **Emerging Market ETFs** target faster-growing but more volatile economies like China, India, and Brazil. **Frontier Market ETFs** invest in the earliest stages of capital market development, such as Vietnam or Nigeria.
Key Takeaways
- They provide a convenient way to gain exposure to foreign markets through a single ticker.
- They can be broad (global ex-US), regional (Europe, Asia), or country-specific (Japan, Brazil).
- International ETFs offer diversification benefits by accessing different economic cycles.
- They carry risks including currency fluctuation, geopolitical instability, and higher expense ratios.
- Some international ETFs hedge currency risk, while others leave it unhedged.
How International ETFs Work
Like domestic ETFs, international ETFs pool money from investors to purchase the underlying securities that make up an index. The fund manager handles the complexity of trading on foreign exchanges, managing currencies, and settling trades. A key structural feature is how they handle currency. When the fund buys a German stock, it must convert US dollars to Euros. The value of the ETF's shares in US dollars will therefore depend on both the performance of the German stock and the USD/EUR exchange rate. - **Unhedged ETFs:** The standard structure. The investor is exposed to currency risk. If the foreign currency rises, the ETF value rises (in USD terms). If it falls, the ETF value falls. - **Currency-Hedged ETFs:** These funds use derivatives (forwards or futures) to neutralize the impact of currency fluctuations. The return depends solely on the stock performance in local terms.
Types of International ETFs
Investors can choose from various geographic scopes.
| Type | Scope | Risk Profile | Example |
|---|---|---|---|
| Broad International | World ex-US | Moderate | Vanguard Total International Stock (VXUS) |
| Developed Markets | Europe, Japan, Australia | Moderate | iShares MSCI EAFE (EFA) |
| Emerging Markets | China, India, Brazil | High | Vanguard Emerging Markets (VWO) |
| Single Country | Specific Nation | Very High | iShares MSCI Brazil (EWZ) |
Real-World Example: Impact of Currency
Compare two hypothetical ETFs investing in the UK FTSE 100 index: ETF A (Unhedged) and ETF B (Hedged).
Advantages of International ETFs
Accessibility is the biggest advantage. They remove the barriers of opening foreign brokerage accounts or converting currency manually. They offer instant diversification and are generally highly liquid. They also tend to be more tax-efficient and transparent than mutual funds.
Disadvantages and Risks
Expense ratios for international ETFs are typically higher than for domestic ETFs due to higher trading and custody costs abroad. They are subject to political and regulatory risks of the countries they invest in. Furthermore, time zone differences can lead to "gaps" in pricing, where the ETF price in the US might deviate slightly from the Net Asset Value (NAV) of the underlying holdings if the foreign market is closed.
FAQs
It stands for "excluding the US." A "Global ex-US" ETF invests in companies all over the world except for the United States. This is useful for US investors who already have significant domestic exposure and want to add complementary international holdings without overlapping.
Yes. They collect dividends from the underlying foreign companies and distribute them to shareholders. These dividends may be subject to foreign withholding taxes, though investors can often claim a foreign tax credit.
If you believe the US dollar will strengthen, a hedged ETF protects you from foreign currency depreciation. If you believe the dollar will weaken (or you want currency diversification), an unhedged ETF is preferable. Unhedged is the default for most long-term strategic allocators.
Emerging markets are more volatile due to less stable political systems, potential for currency devaluation, and less mature regulatory frameworks. However, they offer higher potential growth rates than developed economies.
Major international ETFs are very liquid. However, because the underlying markets (like Tokyo or London) might be closed while the ETF trades in New York, the spread between the bid and ask price can sometimes be slightly wider than for domestic ETFs.
The Bottom Line
Investors looking to build a global portfolio may consider International ETFs. International ETFs are efficient tools for accessing foreign equity and bond markets. Through a single trade, they provide diversification across geographies, currencies, and economies, which may result in reduced portfolio risk and access to global growth. On the other hand, investors must navigate currency risk and higher fees. For most retail investors, international ETFs are the most practical vehicle for going global.
Related Terms
More in ETFs
At a Glance
Key Takeaways
- They provide a convenient way to gain exposure to foreign markets through a single ticker.
- They can be broad (global ex-US), regional (Europe, Asia), or country-specific (Japan, Brazil).
- International ETFs offer diversification benefits by accessing different economic cycles.
- They carry risks including currency fluctuation, geopolitical instability, and higher expense ratios.