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International ETFs

The amount of international exposure that’s right for you depends upon your risk tolerance.

International investing can be an effective way to diversify your equity holdings. While returns have lagged behind US markets, international ETFs provide diversification benefits as they tend to be less correlated to US equities.

Broad exposure or targeted trading?

The amount of international exposure that’s right for you depends upon your risk tolerance and your level of involvement. If you want to take a more hands-off approach, you could leverage a broad-based international equity fund that provides exposure across several countries. For a more targeted approach, you can pursue a single-market ETF, as long as you're willing to track your investment on a daily basis.

In general, most investors may include a mixture of both developed and emerging markets in their international equity holdings. This can be accomplished through ETFs specifically targeting these sectors.

Vanguard FTSE Europe ETF () tracks an index of companies located in the major markets of Europe, with about 24% of the fund’s holdings comprised of United Kingdom companies and with lesser amounts devoted to companies in Switzerland, Germany, and France. SPDR Euro Stoxx 50 ETF (), by contrast, is similar in structure, but holds a slightly different mix, with 40% of its holdings in France and 26% in Germany. The point is there are several ETFs targeting non-US developed economies for investors to consider.

You can take a similar broad-based approach to emerging markets with ETFs that focus on multiple countries across one or several regions. For example, iShares MSCI Emerging Markets ETF () targets several emerging markets, including (as of July 22, 2024) China (accounting for 25% of the fund’s holdings), India (19%), Taiwan (18%), South Korea (12%) and Brazil (4%), followed by Saudi Arabia, South Africa and others.  A similar fund is Vanguard FTSE Emerging Markets ETF Holdings () with top holdings (as of June 30, 2024) of China (27%), India (24%), Taiwan (22%), Brazil (5%), followed by Saudi Arabia, South Africa, Mexico, Thailand, and others.

For a somewhat more focused strategy, investors can take the well-known BRIC approach that targets the combination of Brazil, India, Russia, and China, which has long been the gold standard of emerging-market investing. This brings to mind BRIC funds such as iShares MSCI BRIC (). Although these funds target the same countries, each takes a slightly different approach.

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Single-country promise and pitfalls

Although trading BRIC ETFs remain popular, risk-tolerant investors have been taking more of an active, hands-on approach, seeking out the newest emerging market ETF opportunities with funds that focus on individual countries such as Vietnam, Thailand, Turkey, and South Korea. Before jumping into a single-country strategy, however, you need to be aware of some serious potential downfalls as well as the promise for strong returns.

As you add single-country exposure to your portfolio, be mindful of the potential for overlap if you also hold a regional ETF. Overlap occurs when a broader-based fund includes exposure to a particular sector or market, which is then increased by a more targeted ETF: for example, let’s say you owned Vanguard FTSE Europe ETF (). You'd want to know that nearly 12.5% of the fund’s holdings (as of June 30, 2024) are in Germany before you added a narrow ETF such as iShares MSCI Germany ().

Overlap is not the only concern when it comes to single-country investing: You might be exposed to currency risk. Not only that, the more targeted the approach, the more carefully you have to watch for sudden developments that could turn a potential growth story into a worrisome scenario. For example, in March 2022, U.S. based Russia ETFs were halted indefinitely due to regulator concerns as the Russian stock market closed. In most cases this led to liquidations and delistings of the ETFs, chasing investors out.

A market is hot, and then it's not. Therefore, the investment opportunities you pursue in a single country, particularly those in emerging markets, are often reaped over a period of months. These are not “buy and hold” investments for an auto-pilot type of investor. They require close monitoring on a daily basis.

On the other hand, a diversified international portfolio allows you to benefit more broadly from markets outside of the US, without exposing you to undue risk in a single country. For most investors, this is the way to go.

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Article copyright 2011-2024 by Don Dion and Carolyn Dion. Reprinted and adapted from The Ultimate Guide to Trading ETFs with permission from John Wiley & Sons, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments® cannot guarantee the accuracy or completeness of any statements or data. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint. The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. Consider that the provider may modify the methods it uses to evaluate investment opportunities from time to time, that model results may not impute or show the compounded adverse effect of transaction costs or management fees or reflect actual investment results, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

Past performance is no guarantee of future results.

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

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