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Ask the Expert: How Do I Invest in Foreign Markets?

Editor's note: Got a question you'd like to ask about sectors, companies and issues affecting the markets? Email us at twocents@thestreet.com , and one of our reporters will track down an expert. In today's "Ask the Expert," markets writer Rebecca Byrne lays out the options for adding some overseas exposure to your portfolio.

In the 1990s, most American investors were xenophobes.

With the U.S. economy and stock market growing at a fast clip, investors saw little reason to invest abroad. The Asian financial crisis and problems in Mexico and Latin America only added to investors' sense of isolationism.

But times have changed. The U.S. markets aren't likely to be as strong over the next few years as they were in the prior decade. Meanwhile, other countries such as China are showing real promise.

Of course, there's no way to know which region will outperform, and that's why analysts say it's best to diversify. The question is, how can you get this foreign exposure?

Although it is possible to buy foreign stocks on the local exchanges where they are traded, it's much easier to buy American Depositary Receipts. ADRs, as they are known, are foreign stocks listed on American stock exchanges or sold over the counter. The beauty of ADRs is that they are traded in U.S. dollars, so investors don't have to worry about international transaction costs. What's more, ADRs are subject to the reporting standards and disclosure rules of the Securities and Exchange Commission.

There are currently over 2,000 ADRs available for purchase. For more information or to search for specific ADRs, there are several sites that compile information on them .

But before you rush out and buy an ADR, be aware that there are some drawbacks. For one thing, any dividends you receive from the foreign company are likely to be taxed at the local rate, unless the country has a tax treaty with the U.S. Dividends are taxed at 15% in the U.S., but in other countries this rate can be much higher. While it is possible to apply for a refund, this takes time and effort.

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