However, it is not enough for investors to have exposure to large multinational companies. International diversification means including exposure to foreign-listed stocks.
“You have to invest in a company whose executives are trying to post a profit in local currency,” Bruno Solnik, a finance professor at Hong Kong University of Science and Technology, said in the article.
Currently, the average 401(k) account holds less than 18% in foreign stocks. Meanwhile, the foreign equity market represents about 50% to 60% of the total market value of globally trade stocks. Investment experts, though, suggest that investors should hold at least 20% to 30% of their equity portfolio in foreign stocks.
Additionally, investors who are looking to diversify shouldn’t put all of their money into one or two country-specific ETFs as it could end up increasing their risk exposure. To put country exposure in perspective, the emerging markets represents about 11% of companies in the MSCI All-Country World Index + Frontier Markets Index, and frontier markets makes up 0.3%. The remaining 89% of value are from companies listed in developed markets.
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.