The large number of available mutual funds and exchange traded funds -- ETFs -- leads to the division of funds into different categories based on the types of investments a particular fund owns. The two broad categories are stock and bond funds. The term "global equity" typically describes a sub-category of funds on the stock funds side of the ledger.
Mutual funds that only invest in U.S. stocks are categorized as domestic stock funds. International equity funds own stock shares of companies from other countries -- no U.S.-based stocks. A global equity fund has the latitude to buy shares of companies from any country including the United States. The typical global equity fund will keep a certain portion of its assets invested in U.S. stocks and the balance invested in international stocks.
A fund with a global investment objective has several advantages over funds limited to the domestic stock market. The stock markets of different countries may provide better performance at different periods of time. The global fund manager can choose from the most attractive markets as well as individual stocks. In the global economy, some regions provide the top companies for certain sectors, such as Asia for tech manufacturers, Australia for mining companies or Switzerland for banks and drug manufacturers.
The worldwide investment reach of a global equity fund can be divided into three type of country categories: domestic U.S. stocks, established economy stocks and emerging market stocks. Most global equity funds will report how the assets are divided based on these or similar categories. Review how a prospective global equity fund investment allocates between the three categories. A particular fund may go with a balanced approach or be willing to overweight in one area if the fund manager believes the investment potential is better.
Along with the diversification of a combination of U.S. and international stocks, global equity funds add some risk factors compared to U.S. stock funds. A major risk is currency fluctuations. A strong dollar against foreign currencies will result in lower international stock values when converted to dollars. International stock markets may experience higher levels of volatility than the U.S. markets with bigger swings to both the upside and downside. Investors must be willing to accept a higher level of uncertainty from a global stock portfolio.
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