Sticking to familiar names when investing can be a good thing, but too much of it may confine you to a certain area of the marketplace. If you’re one of millions of Americans underallocated in international exchange traded funds (ETFs), it might be time to entertain the idea.
The United States may make up only 42% of the global equity markets, but the average American investor keeps 72% of stock assets in the United States, or what local companies call “home bias,” reports Jason Zweig for The Wall Street Journal.
When American investors did invest overseas, they go “lopsided,” Zweig says, largely jumping at emerging markets. Around 95% of the $25 billion in U.S investor money finding its way into countries like Brazil, Russia, India and China during 2009. By 2010, around $300 billion was directly invested in the developing world, and maybe another $110 billion indirectly. [Reasons to Stick With Emerging Markets.]
The average fund investor’s portfolio includes an allocation of around 68% in the United States, 6% in emerging markets and 26% everywhere else. The MSCI’s All Country World Index approximated that all of the world’s investors have placed around 42% in the United States, 45% in developed foreign markets and 13% in emerging markets. [Indonesia ETF: BRIC Material?]
The argument for investing globally used to be based on low correlations – if one area of the world tanks, another may be thriving. However, in 2008, stocks around the world plummeted, and during 2009, stocks around the world rose in unison.[Why the IMF Is Bullish On India’s ETFs.]
Correlation between foreign and U.S. stocks now stands above 90%. There are better reasons to invest globally now, though:
- Holdings are denominated in other currencies. By holding investments in another currency, an investor has a safeguard against possible devaluations of the dollar.
- Investing overseas gives you diversification away from U.S. assets. You wouldn’t work at General Motors and have your portfolio consist entirely of GM stock (would you?). Talk about having all your eggs in one basket. [6 Things You’re Missing If You Don’t Have Global ETFs.]
Zweig suggests thinking about international investing the same way you would domestic – look at sectors, growth, value and various asset classes. But whatever you do, be sure that international markets are a part of your overall portfolio, or you could wind up missing the boat.
For more information on international investments, visit our global ETFs category.
Among the many global ETFs investors have to choose from these days include these broad funds:
- Vanguard FTSE All World-Ex US ETF (NYSEArca: VEU)
- iShares MSCI EAFE Index ETF (NYSEArca: EFA)
- iShares MSCI All Country Asia Ex-Japan ETF (NYSEArca: AAXJ)
- Vanguard Emerging Markets ETF (NYSEArca: VWO)
- iShares MSCI Emerging Markets (NYSEArca:EEM)
- EGS Dow Jones Emerging Markets Titans Composite (NYSEArca: EEG)
- SPDR S&P Emerging Markets (NYSEArca: GMM)
- Schwab Emerging Equity Markets ETF (NYSEArca: SCHE)
- GlobalShares FTSE Emerging Markets Fund (NYSEArca: GSR)
Max Chen contributed to this article.