How to Invest in International ETFs: Benefits, Risks and Strategies

International exchange-traded funds (ETFs) give investors access to companies and markets outside the United States without requiring them to research and purchase individual foreign stocks. Adding international investments can broaden a portfolio by including businesses that operate under different economic conditions and market cycles than those in the U.S. However, investing overseas also introduces considerations that domestic investments may not, including currency movements, political developments and differences in market regulation.

A financial advisor can help you decide how much of your portfolio to allocate to international ETFs based on your goals and risk tolerance.

What Are International ETFs and How Do They Work?

U.S. registered international ETFs bundle stocks, bonds or other securities from foreign markets into a single investment that trades on a U.S. stock exchange. Instead of selecting individual companies across multiple countries, investors can purchase one fund that tracks a broad market index or a narrower segment of the international market. Most international ETFs seek to match the performance of an index, although some are actively managed and rely on portfolio managers to select investments. ¹

The type of international ETF determines which markets you own. Broad developed-market ETFs generally invest in countries with established financial markets, including Canada, Japan, Germany and the United Kingdom. Emerging-market ETFs focus on economies classified as emerging by the fund’s index provider or investment strategy, which may include countries such as India, Brazil and Mexico. Other funds narrow their focus to a specific region, such as Europe or Asia-Pacific, or even a single country. ²

Investors should also distinguish between international ETFs and global ETFs. International ETFs invest only outside the United States, while global ETFs combine U.S. and international securities within the same investment portfolio.

Like other exchange-traded funds, international ETFs trade throughout the day at market prices rather than once after the market closes like mutual funds. This allows investors to buy or sell shares whenever the market is open. ³

How to Invest in International ETFs

Choosing an international ETF starts with deciding the role international investments will play in your overall portfolio. Some investors use a broad international ETF to complement popular U.S. stock holdings, while others add regional or country-specific funds to increase exposure to particular parts of the world.

Once you decide where you want to invest, compare how different ETFs are constructed. Two funds with similar names may track different indexes, resulting in different country weightings, industries and individual holdings. Reviewing the underlying index and portfolio composition provides a clearer understanding of what you are actually buying.

Cost also matters. International ETFs charge annual expense ratios that reduce investment returns over time. While fees vary, comparing similar funds can help identify lower-cost options that meet the same investment objective. Trading volume and bid-ask spreads also deserve attention because less actively traded funds can be more expensive to buy or sell.

Finally, consider how an international ETF fits alongside your existing investments. Many diversified U.S. funds already include multinational companies with substantial overseas operations. Reviewing your overall asset allocation can help prevent unintended overlap while maintaining the level of international exposure you want.

Benefits and Risks of International ETFs

International ETFs can diversify a portfolio beyond the U.S. market by investing in companies operating under different economic conditions. Markets around the world do not always perform the same way at the same time, so international holdings may perform differently than domestic investments during certain market environments.

International investing also provides access to businesses and industries that may have a smaller presence in U.S. markets. Depending on the fund, investors may own companies involved in manufacturing, financial services, energy, consumer products, pharmaceuticals and other market sectors that play a larger role in foreign economies.

However, investing internationally also introduces additional risks. Changes in currency exchange rates can affect returns when foreign investments are converted back into U.S. dollars. Political developments, government policy changes, trade disputes and local economic conditions can also influence investment performance differently than they do in domestic markets.

Investors should also understand how taxes may apply to international investments. Some countries withhold taxes on dividends paid to foreign investors. ETF shareholders may be able to claim a foreign tax credit for certain foreign taxes, including taxes passed through by an eligible fund, subject to IRS rules. ⁴ Corporate reporting standards, disclosure requirements and market regulations may also differ across countries.

Example International ETF Portfolios

There is no single allocation that works for every investor. The appropriate balance between U.S. and international investments depends on factors such as financial goals, investment horizon and risk tolerance.

These examples are hypothetical and are intended only to illustrate different approaches to international diversification. Your own allocation should reflect your financial circumstances, investment objectives and willingness to accept investment risk.

Common Mistakes to Avoid

One common mistake is concentrating too much of an international allocation in a single country. While country-specific ETFs can provide targeted exposure, they also increase reliance on the economic and political conditions of one market.

Another is assuming that owning multiple international ETFs automatically creates greater diversification. Funds with different names may hold many of the same companies, making it important to review holdings before investing.

Investors should also understand whether an ETF hedges currency exposure. Currency-hedged and unhedged international ETFs can produce different results even when they own similar investments because exchange-rate movements affect returns differently.

Finally, international investments should match your investment horizon. Foreign markets can experience extended periods of underperformance or elevated volatility, making them less appropriate for money that may be needed in the near future.

A financial advisor can help you determine how much international exposure fits your portfolio, compare ETF options and build a diversified investment strategy aligned with your long-term financial goals.

Bottom Line

International ETFs can complement a diversified portfolio by expanding your investments beyond the U.S. market and providing access to companies, industries and economies around the world. The right approach depends on balancing the potential benefits of broader diversification with risks such as currency fluctuations, political developments and market volatility. Before investing, compare each fund’s holdings, costs and geographic exposure to determine how it fits within your overall investment strategy.

Investment Planning Tips

• A financial advisor can help you compare international ETFs based on their geographic exposure, costs and currency risk. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to diversify your portfolio, here’s a roundup of 13 investments to consider.

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