Investment portfolio diversification can be achieved with investing in exchange traded funds that track overseas markets. There are plenty of benefits that come with international investing but risks should be considered before jumping in.
“One of the hallmarks of a successful portfolio is supposed to be diversity. But diversity isn’t just about asset class. You can also add diversity with the help of geography,” Miranda Marquit wrote for US News.
Foreign stocks and ETFs add diversification benefits to a portfolio since they tend to be uncorrelated to U.S. stock markets. ETFs are great diversifiers since they contain several stocks, which will spread out risk. It is important to look at what companies a fund holds to avoid over or under allocation to a certain sector or stock. [ETF Industry Trends in 2013: Bonds, Dividends and Emerging Market Debt]
There are ETFs that cover the spectrum of foreign asset classes. Certain ETFs track foreign currencies, while others track foreign bonds. An example is the iShares JPMorgan USD Emerging Markets Bond Fund (EMB) which is denominated in U.S. dollar bond securities.
An overseas REIT (real estate investment trust) is an effective way to invest in international property, while avoiding the need for large amounts of money or dealing with the regulation that comes with property ownership. The Global X SuperDividend ETF (SDIV) focuses about 25% of the portfolio on REIT investments from around the world. The 7.5% dividend yield is one of the higher payouts around. [Finding the Best ETFs for Emerging Market Bonds]
Foreign investment can be just as risky as owning domestic stocks, so be aware of what could impact your investment. The following are some of the risks that should be considered:
- Geopolitical risk: Certain overseas markets, such as emerging markets, are subject to geopolitical risk, such as financial market corruption or poor leadership. For example, Egypt’s economy and stock market rallied high in 2012, until the Israel-Hamas ceasefire and the Morsi administration began regulating corporations. [Egypt ETF in Focus After Hamas-Israel Ceasefire]
- Lower liquidity: Since some of the overseas economies may not be as popular as broad-based U.S. stock ETFs, the asset levels may not be as strong. Investing in ETFs that are based on foreign currencies is a way to mitigate this.
- Exchange risk: Is the ETF investing in U.S. dollars, or another foreign currency? Dividend payouts can also be denominated in a foreign currency so beware. Conversion fees and stock market influence will impact returns.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own EMB.
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