Investors who want overseas exposure but are less familiar with foreign companies can use international exchange traded funds to diversify a portfolio.
Many may know or at least heard of the U.S. companies they are invested in, but when looking to diversify with overseas securities, investors are faced with unfamiliar names and other added risks, writes Adam Zoll of Morningstar.
“One might argue that investors interested in diversifying their portfolios with foreign stocks are particularly in need of help from funds and fund managers with expertise in this area,” Zoll said.
For instance, instead of meticulously building up a portfolio of individual foreign stocks, an investor can look at broad and diversified ETFs, such as the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) and iShares Core MSCI EAFE ETF (NYSEArca: IEFA). Both VEA and IEFA are passively managed, low cost options that help investors gain exposure to thousands of companies domiciled in the developed foreign markets. Moreover, income investors may also find that overseas assets produce slightly more attractive dividend opportunities.
VEA tracks the FTSE Developed ex North America Index, which includes large- and mid-cap stocks taken from developed Europe, Asia and Australia. Top country weights include Japan 22.5%, U.K. 19.3%, France 8.7%, Switzerland 8.5% and Germany 8.3%. Additionally, unlike other indices, this developed market index includes South Korea, which FTSE ranks as a developed country. VEA follows a cap-weighted index, but it has 1,355 component holdings, so the largest position, Nestle SA, only makes up 1.7% of the portfolio. The ETF also comes with a cheap 0.09% expense ratio and a 2.77% 12-month yield.
IEFA tries to reflect the performance of the MSCI EAFE Investable Market Index, which includes developed Europe, Australasia and Far East markets. Top country weights include Japan 22.9%, U.K. 20.6%, France 9.0%, Switzerland 8.6% and Germany 8.6%. IEFA has 3,211 component holdings, and comes with a 0.14% expense ratio and 2.71% 12-month yield.
Additionally, investors can consider a broader international exposure, with the Vanguard Total International Stock ETF (NYSEArca: VXUS) and iShares Core MSCI Total International Stock ETF (NYSEArca: IXUS), which both include some emerging economies. [Returning to Emerging Markets ETFs]
VXUS follows the FTSE Global All Cap ex US Index of about 5,490 companies taken outside of the U.S. While the top country weights include developed markets like Japan 16.6%, U.K. 14.5% and Canada 6.9%, the ETF also includes a 13.5% tilt toward the emerging markets, with a good 5.3% position in China. The fund also has a cheap 0.14% expense ratio and a 2.72% 12-month yield.
Lastly, IXUS tracks the MSCI All-Country World ex USA Investable Market Index. Along with developed market exposure, the ETF also includes a 14.9% position in emerging markets, with a 5.9% tilt toward China, its largest developing country weight. IXUS has a 0.14% expense ratio and a 2.71% 12-month yield. [iShares Core ETFs Gain Institutional Fans]
For more information on the developed markets, visit our global ETFs category.
Max Chen contributed to this article.