Emerging markets and related exchange traded funds (ETFs) were among the best performers of any equity category and they could still be a worthy investment for a diversified portfolio.

Foreign investments have offered higher returns that domestic investments, writes Donald Jay Korn for Financial Planning. The 10-year annualized return of international stock funds were doing slightly better than domestic stock funds. On average, emerging market funds showed a 7.7% return per year for the last 10 years. Investors also can’t ignore the fact that two-thirds of the world’s market capitalization lies outside the United States.

Korn provides some interesting points on why foreign investments are still an essential part of a diversified portfolio.

• Safety. After the spectacular fall of Asian and European stocks, many people are investing defensively. International equity managers are looking into large caps and other big brand names that they are already familiar with.
• Value. Foreign energy companies could be the ultimate winners when oil prices start to rise again. The increased revenues will go to the firms with lots of reserves on hand.
• Dividends. International money managers look for companies with high dividends. Foreign companies usually have higher yields when compared to U.S. companies.
• Asia. Japan is still a large foreign market, but many think the country is too reliant on exports and would be subject to the repercussions of a strong yen. However, Japanese company balance sheets are strong, households save and lots of their companies are trading below book value. Other Asian markets have a higher risk but there are potential higher rewards.
• Convertibles and Bonds. Asian convertibles allow investors to convert to the issuer’s common stock. Yields may be in the double digits and the best ones can be found in the emerging markets. Total returns for high quality foreign corporate bonds could also reach into the double-digits.

iShares MSCI Emerging Markets Index (EEM): up 16.5% year-to-date

PowerShares BLDRS Asia 50 ADR Index Fund (ADRA): up 5.4% year-to-date

Max Chen contributed to this article.

Tags: ADRA, Asia, EEM, Emerging Markets, Energy, Europe, Global ETFs, Japan, Oil