Get Familiar With Foreign Stocks

Investors scared off by the specter of higher fees would surely kick themselves if they saw the reality of foreign fund returns. Year-to-date returns in foreign large-cap value funds are 10.39%, double those of similar domestic funds. And diversified emerging markets funds have returned 9.1% this year, tripling the S&P 500 and demonstrating that there is much money to be made from globe-hopping.

The wide difference in returns between foreign and domestic funds clearly demonstrates the importance of geographical diversification. While some countries' economies are booming, others will be busting. That's why it's a safer bet for investors to spread their chips around the globe instead of pinning their hopes on a single country.

Nevertheless, many fund analysts say the increasing trend toward globalization might be reducing the need for outsized foreign allocations. Lipper strategist Andrew Clark says that the world's major economies -- the U.S., Japan and Europe -- are growing more and more synchronized, thus reducing the need for U.S. investors to cross borders.

Ronald Roge, financial adviser at New York-based R.W. Roge & Company, agrees, saying, "Due to globalization, foreign funds provide less diversification than they did 10 years ago." Nevertheless, Roge has increased his position in his favorite foreign funds, the (JIEIX Quote)Julius Baer International Equity fund and the (SGOVX Quote)First Eagle Overseas fund, as "a play against the dollar." Most funds do not hedge currency risk, so a declining dollar tends to boost foreign stocks.

Analysts say emerging markets funds remain relatively uncorrelated to the global marketplace, which is why many suggest a two-fund strategy of combining a foreign large-cap value fund with an emerging-markets fund or a single-country exchange traded fund to provide some extra kick. Single-country ETFs, which are index funds that trade like stocks, are now available for countries across the globe, including the iShares MSCI Brazil Index(EWZ Quote) ETF, iShares MSCI Japan Index(EWJ Quote) ETF and the recently released iShares China Trust(FXI Quote) ETF.