Most U.S. investors maintain a sizable home country bias: The proportion of U.S. stocks in their portfolio is overweighted relative to their allocation in the global stock market. Some investors prefer to invest solely in U.S. stocks altogether, whether out of patriotism, familiarity or due to their historically high returns. A heavy allocation of U.S. stocks tends to be tax-efficient and reduces currency risk.
That being said, there have been extended periods in which the U.S. market has languished. Consider the “Lost Decade” from 1999 to 2009, during which U.S. stocks posted an annualized loss of 0.7%. The cause of this stagnation was three consecutive years of losses after the 2000 dot-com bubble, followed by a catastrophic market crash during the Great Recession.
The lesson here is that investing in a single country, even if it is a robust, well-performing market like the U.S., is fraught with increased concentration risk. By diversifying internationally, investors can hedge against this. Case in point: Emerging markets returned an annualized 8.9% during the “Lost Decade.” Investors who diversified during this time were rewarded handsomely.
“International equities are a core component of a globally diversified investment portfolio,” says Christine Franquin, principal and senior portfolio manager at Vanguard’s Equity Index Group. “Vanguard’s recently released 2023 Economic and Market Outlook expects international equities to outperform U.S. stocks over the next decade, largely driven by lower valuations, higher dividend yields and a favorable currency outlook.”
When it comes to investing internationally, a great alternative to converting currency or using American Depositary Receipts is investing via mutual funds and exchange-traded funds, or ETFs. These funds provide exposure to international equities based on different rules. They can target overall markets or specific countries or go in-depth to target specific sectors or industries.
Here are seven of the best international stock funds to buy in 2023:
- Fidelity International Index Fund (ticker: FSPSX)
- Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)
- iShares Core MSCI Total International Stock ETF (IXUS)
- iShares MSCI China ETF (MCHI)
- The Emerging Markets Internet & Ecommerce ETF (EMQQ)
- SPDR S&P Global Dividend ETF (WDIV)
- Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
Fidelity International Index Fund (FSPSX)
A straightforward, low-cost approach to indexing a high-quality portfolio of international stocks is via FSPSX. This fund tracks the MSCI Europe, Australasia and Far East Index, which provides passive exposure to 805 developed market equities from the eurozone and Asia-Pacific regions.
Like many Fidelity funds, FSPSX requires no minimum initial investment and charges zero transaction fees or sales loads. The fund is highly cost-effective, with a low 3% turnover rate and an expense ratio of 0.035%, which works out to around $3.50 in annual fees for a $10,000 investment.
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)
Emerging market equities are shares of companies from countries like Brazil, Russia, India and China. While these stocks can be quite volatile, they often trade at attractive valuations. A low-cost, diversified way to passively invest in these stocks is via VEMAX.
This fund tracks over 5,500 emerging market stocks weighted by market capitalization, with 34.2% of its underlying holdings coming from China, 17.4% from India, and 16.2% from Taiwan. VEMAX charges an expense ratio of 0.14% and has a minimum required investment of $3,000.
iShares Core MSCI Total International Stock ETF (IXUS)
Investors trying to keep their international equity allocation simple can consider an ETF like IXUS, which holds both developed and emerging-market equities in a single ticker. As an ETF, the minimum required investment for IXUS is simply the price of a single share. IXUS closed at $63.01 on Jan. 24.
IXUS is a highly popular pick among U.S. investors looking for a low-cost fund to complement a U.S. market ETF. Since its inception in 2012, the ETF has attracted over $31 billion in assets under management, or AUM, largely thanks to its low 0.07% expense ratio.
iShares MSCI China ETF (MCHI)
Many investors are eagerly anticipating the reopening of China, referring to the country’s relaxation of COVID-era restrictions. “In particular, the Chinese tourism sector should also begin to blossom again, which will help increase consumer demand,” says Richard Gardner, CEO of Modulus Global.
A straightforward way of gaining Chinese market exposure is via MCHI, which tracks the MSCI China Index. This ETF holds 623 Chinese equites weighted by market cap, with its two heaviest weightings being the Chinese-listed shares of Tencent Holdings Ltd. (TCEHY) and Alibaba Group Holding Ltd. (BABA). That said, MCHI does charge a higher expense ratio of 0.58%.
The Emerging Markets Internet & Ecommerce ETF (EMQQ)
Emerging market investors can also take a thematic approach by drilling down into certain industries that are expected to grow rapidly. A possible candidate here is EMQQ, which tracks an index of online retail, search engines, social networking, e-payments and gaming companies.
“The bull case for EMQQ comes from the expansion of the middle class in these markets, coupled with affordable smartphones” that can provide access to the internet for the first time, says Scott Krase, wealth manager at Connor & Gallagher OneSource. EMQQ charges a 0.86% expense ratio.
SPDR S&P Global Dividend ETF (WDIV)
Dividend investors can invest globally too. Looking internationally can net some great companies that pay above-average yields. A great ETF to implement this strategy is WDIV, which holds 91 global dividend stocks that have increased or maintained stable dividends for at least 10 consecutive years.
While WDIV has a 20.2% U.S. allocation, the rest is held in top-quality dividend stocks from countries like Canada, Japan, Hong Kong, the U.K., China and Switzerland, all screened for sustainable payout ratios. WDIV charges an expense ratio of 0.4%.
Vanguard Total World Stock Index Fund Admiral Shares (VTWAX)
Perhaps the easiest way to access a globally diversified equity portfolio is via VTWAX, which holds both U.S. and international stocks according to the current market cap weightings. As of Dec. 31, 2022, this fund held 9,473 stocks, with a 59% allocation to the U.S. and 41% allocation to international stocks, making it highly diversified.
The main benefit of VTWAX is simplicity. With this fund, there’s no need to slice and dice or fret over market allocations. As the world changes, the composition of VTWAX will too. In many ways, VTWAX is the ultimate passive investment. The fund charges a 0.1% expense ratio.
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