Today’s investors aim to diversify their holdings across different asset classes and geographic regions. Portfolio theory holds that diversified investments provide higher returns and lower risks than limited portfolios do. International instruments like stocks and bonds give U.S. investors access to different opportunities around the globe that may have a low correlation to U.S. securities and to one another. Most investors participate in the international markets through mutual funds and exchange-traded funds, or ETFs.
International stocks, both common and preferred, are issued by corporations outside the U.S. They may trade on several different exchanges around the world, including in the U.S. in the form of American depositary receipts, or ADRs. Depending on their sponsorship level, ADRs may trade in the U.S. and be used by foreign corporations to raise capital in the U.S. Global stocks, including U.S. and international stocks, are tracked by indexes such as the MSCI World Index and the S&P Global 1200.
International Stock Funds
Many mutual fund companies offer international stock funds that cover one or more countries or regions. The most diversified versions are international funds, which contain representative stocks from around the globe, excluding the U.S. Regional funds cover markets in areas like Latin America or Asia and the Pacific Rim. The most focused international stock funds are single-country funds. As the focus narrows, funds tend to become less diversified and thus riskier. International ETFs are baskets of foreign stocks that trade as units, and they may be broadly diversified or focused on a specific region or country. They often track an international stock index.
International bonds include debt issued by foreign governments and corporations. International government bonds are usually denominated in the country’s currency and offer interest rates partially driven by local inflation rates. Some foreign government bonds offer higher interest rates than U.S. government bonds, but high interest rates tend to depress economic activity by making borrowing more expensive. This ultimately weakens a country's currency, as investors do not want to hold the currencies of sluggish economies with low growth rates. Instead, they move their money to countries with robust economies because these investments provide higher returns. Should investors move their money to countries with stronger growth, the income they get from foreign bonds denominated in a weakening currency loses value when that money is translated into strong currencies like the U.S. dollar; weakening foreign currencies buy fewer U.S. dollars. Corporate international bonds trade with higher interest rates than do government bonds because of credit risk. Some international bonds are denominated in U.S. dollars to attract American investors.
International Bond Funds
Mutual funds and ETFs offer many different kinds of international bonds: corporate and government, long term and short term, bonds specific to a country or region, high yield and low yield. Indexes such as the Barclay’s Global Aggregate and the Global Aggregate Corporate track global bonds. Some funds tie their returns to international indexes, so the choice of an index dictates an investor’s exposure to some subset of international bonds. International stock and bond funds tend to move in opposite directions: Stock funds do well in good economic environments, and bond funds are a better choice when economic conditions are deteriorating.
Video of the Day
- "Investing Without Borders: How Six Billion Investors Can Find Profits in the Global Economy": Daniel Frishberg, Arthur Laffer
- "Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less": Mike Piper
- "International Financial Management": Jeff Madura
- BananaStock/BananaStock/Getty Images