International Investments: Stocks, Bonds, & ETFs

You may not be as familiar with the names of companies outside the United States, which might make you feel like the stocks and bonds they issue are risky. But if you invest in an international mutual fund or ETF (exchange-traded fund), you're increasing your portfolio's diversification by getting access to hundreds—sometimes thousands—of foreign securities.

What is international investing?

International investing means putting your money into assets or companies based outside your home country. This can include buying stocks, bonds, mutual funds, or ETFs in foreign markets. In contrast, domestic investing means putting money into companies and entities within your own country.

Why invest internationally?

Markets outside the United States don't always rise and fall at the same time as the domestic market, so owning pieces of both international and domestic securities can level out some of the volatility in your portfolio.

Some benefits of international investing include:

• Diversification. Spreading your investments across different markets can help reduce overall portfolio risk by providing a buffer against domestic market fluctuations.
• Exposure to high-growth markets. Emerging markets can provide an opportunity for higher returns.
• Currency and economic advantages. Foreign currencies and economic cycles have the potential to favorably affect investment returns.
• Reduced reliance on U.S. economic performance. Investing internationally can help you potentially benefit from economic growth in other regions, even if the U.S. economy is underperforming.

Risks of international investing

Investments in international markets are exposed to an additional source of volatility: currency exchange risk. Fluctuations in exchange rates can either enhance or diminish the value of your international investments. Since international bonds may be more affected by currency risk than international stocks, consider hedging international bond investments in U.S. dollars.

There may also be international investment risks associated with global political or economic instability. Government policies, trade regulations, and geopolitical events can significantly influence international market volatility. Changes in government policies, such as tax laws or investment regulations, can affect the profitability and stability of foreign investments. Trade regulations, including tariffs and trade agreements, can affect the cost and accessibility of international assets. Finally, geopolitical events like political unrest, conflicts, or diplomatic tensions can lead to sudden market fluctuations and increased uncertainty.

These international investment risks highlight the importance of thorough research and a well-diversified portfolio to mitigate potential downsides.

Choosing an international market

International markets are generally divided into 3 categories:

• Developed markets are in countries that have established industries, widespread infrastructure, secure economies, and a relatively high standard of living. Examples of developed markets include the United Kingdom, Japan, Australia, Canada, and France.
• Emerging markets are in countries that have developing capital markets and less stable economies. However, they're considered to be in the process of transitioning into developed markets, and they may be experiencing rapid growth. Currently, emerging markets typically make up about 15% to 25% of international markets in total. Examples of emerging markets include India, China, Egypt, South Africa, Mexico, and Russia.
• Frontier markets are early-stage markets with high risk and reward potential. These include many countries in Africa, the Middle East, and South America.

Not surprisingly, developed markets share certain characteristics with the United States when it comes to volatility levels and the range of potential returns.

Emerging markets and frontier markets are more volatile than developed markets and have a wide range of potential outcomes. For that reason, we recommend that you don't overweigh your allocation to emerging or frontier markets.

Selecting a geographic region

Many international funds invest across multiple markets within a specific area of the globe, like:

• Asia-Pacific. Fast-growing economies in countries like China, India, Japan, and Australia offer high potential returns but come with higher volatility and political risks.
• Europe. Stable markets in the United Kingdom, Germany, and France provide lower risk and more consistent returns, but growth may be more moderate.
• Latin America. Resource-rich economies in countries like Brazil and Mexico have significant growth potential, but they're subject to economic and political instability.
• Middle East and Africa. Frontier markets offer emerging opportunities and high growth potential, but they carry higher risks due to less developed financial systems and political uncertainty.

Choosing an investment type

There are 3 major types of international investments:

• International stocks allow you to invest in individual foreign companies.
• International bonds offer fixed-income products. These are investments that can provide a steady stream of income, typically through regular interest payments, and are issued by foreign governments or corporations.
• International mutual funds and international ETFs both offer diversified exposure to global markets, which allows you to spread your risk across multiple countries and asset types. International mutual funds often have higher expense ratios because they involve more active management, research, and operational costs. They trade at the end of the day based on net asset value. ETFs, on the other hand, typically track an index, which is less costly to manage. They trade anytime during market hours like individual stocks.

There are a few ways you can invest in foreign markets:

• International funds invest only in foreign markets outside of the United States.
• Global or world funds provide exposure to both foreign and U.S. markets.
• Regional funds invest primarily in a specific part of the world, like Europe or the Asia-Pacific region.
• Developed markets funds focus on foreign countries with proven economies, like Japan, France, or the United Kingdom.
• Emerging markets funds combine investments in countries that are considered to have "developing" economies, like India, Brazil, or China.

How much of your portfolio should be in international investments?

In general, Vanguard recommends that at least 20% of both stocks and bonds in your portfolio should be held in international investments. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.