Editor's note: Got a question you'd like to ask about sectors, companies and issues affecting the markets? Email us at firstname.lastname@example.org, 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.
Another concern is that earnings-per-share statistics and price-to-earnings metrics might be hard to decipher. While some multinational companies report their numbers in different currencies, others don't.
, for example, recently reported its third-quarter earnings in euros, not dollars.
If you don't want to do the analysis yourself, think about purchasing a mutual fund that invests in global stocks. Some portfolio managers invest in developed economies such as Canada and Europe, while others plow money into emerging markets such as Africa and Latin America. Analysts recommend purchasing a fund that invests on a worldwide basis, to spread out the risk.
Vanguard Total International Stock Index (ticker: VGTSX) fund is a solid bet for investors looking to diversify. This so-called fund of funds invests in Europe, Asia and the emerging markets. Its expenses are low, and the fund has beaten most actively managed funds since 2000.
Julius Baer International Equity fund (ticker: JIEIX) is another interesting play. The fund has a trailing five-year annualized return of 13%, ranking No. 1 in its category, according to Morningstar.
A third way to gain exposure to overseas markets is through exchange-traded funds. These instruments are built like funds but trade like stocks on U.S. exchanges. One option is to go with the
iShares MSCI Europe, Australia, Far East
index fund. According to Morningstar, this ETF costs 35 basis points per year and is relatively tax-efficient.
iShares Global 100
index fund also invests broadly overseas, but most ETFs track single country or regional indices. To track the U.K. market, try the
iShares MSCI U.K Index
. Investors can get exposure to the Japanese market by purchasing the
iShares MSCI Japan
Although owning foreign stocks, either through an ADR, exchange-traded fund or mutual fund, carries some foreign exchange risk, many analysts have called for the dollar to trade down over the next year or so. Getting exposure to foreign stocks now might be one way to profit from that.