Investing in International Markets

Investing in the S&P 500 is a common go-to strategy for young investors, since it offers the unparalleled benefits of diversification. That said, it only includes US-based companies - and the international economy is incredibly large! 

Investing doesn’t have to be limited to your country of residence - investing in foreign markets can be a great way of diversifying your portfolio, and of participating in the growth of emerging economies. International investing can help you spread your risk across foreign companies & markets, while helping you stay educated on developments occurring in your countries of investment.  

If you’re in the United States, there are multiple ways of investing in foreign markets or in international growth - listed in order of accessibility and ease: 

Global Mutual Funds & Exchange-traded Funds (ETFs):

• There is a vast number of global mutual funds & international index funds available to investors through many brokers (Vanguard, Charles Schwab, Fidelity, etc.) 
• Funds have been tailored to different regions (ex. Latin America, China, India, Japan) & by investment-size (ex. Large-Cap, Small-Cap, Mid-Cap) 

Multinational Corporations (MNCs) 

• Investors who would rather not invest in foreign companies can instead invest in domestic companies - that have a significant portion of their revenues or capital overseas 
• Examples of MNCs include Alphabet (Google), Ford, Coca-Cola, and Microsoft. By investing in these companies, investors have a stake in international growth 

American Depository Receipts (ADRs) 

• ADRs are a feasible way for U.S. investors to purchase foreign stocks. Foreign companies use ADRs to establish a presence in the United States or to raise capital via an IPO 
• Alibaba (BABA), a Chinese technology company, raised capital via an IPO and trades in the United States as an ADR 

Global Depository Receipts (GDRs)

• Here, a depository bank issues shares of foreign companies into international markets (usually European markets) - which are made available to U.S. investors 
• The London Stock Exchange & Luxembourg Stock Exchange are common destinations for the listing of GDRs 

Foreign Direct Investing

• FDI is a much more convoluted form of investment into foreign companies, and is characterized by taking a controlling ownership stake in a foreign business
• It is a highly involved form of investing, and comes with technical costs, tax implications, regulatory issues, and currency conversions 

Due to the inherent risk of investing in foreign companies, it is important to weight the investments in your portfolio according to your risk profile. For example, if you’re a conservative investor, it’s probably better to not have significant portions of your portfolio in foreign stocks. 

Other drawbacks of investing in foreign markets include higher fees and greater tax inefficiencies. While it is possible to have a diverse and successful portfolio without investing in the international markets, doing so can allow investors to expose their portfolio to the potential upsides of international growth, and of diversifying away from US-specific downturns.