International investing comes with its own unique set of risks, but awareness of these risks can help mitigate volatility en route to a diversified portfolio.
One of the inherent risks of investing in international equities is that their performance can be tied to the respective country’s local currency. That can make international investing a volatile affair given the way currencies relative to the dollar can fluctuate wildly.
This year, international economies have seen inflation weigh-in while an extra wild card in the form of the Omicron variant is adding an extra dose of volatility to global markets. Meanwhile, the U.S. dollar is gaining strength with the prospect of higher interest rates to come in 2022—a gloomy sign for currencies pegged to the dollar in the foreign exchange market.
All that said, investors looking to diversify their portfolios overseas need to tread lightly. Getting defensive is almost imperative for international investing.
“Foreign or international investments also contain specific risks. When you purchase foreign stocks, you’ll find that fluctuations in the value of currencies relative to the U.S. dollar can affect your returns,” a Statesville.com article said. “Also, international investments may carry political risk, since some foreign governments and political systems may change in ways that work against businesses in those countries. To contain these types of risk, you’ll want to maintain an appropriate allocation of international holdings and diversify across regions.”
Add Quality to International Investing
One way to deal with the nuances of investing overseas is to focus on the quality factor. Furthermore, it can be automated within an exchange-traded fund (ETF) wrapper using the FlexShares International Quality Dividend Defensive Index Fund (IQDE).
Seeks investment results that correspond generally to the price and yield performance of the Northern Trust International Quality Dividend Defensive Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater financial strength and stability characteristics relative to the Northern Trust International Large Cap Index.
“While international dividend investing is for some investors a well-established equity investment strategy, blindly pursuing international stocks with the highest dividend yields may be dangerous in the long run,” FlexShares said on the product website. “High dividend yields may mask underlying problems—such as weak stock prices due to poor financial performance—that could result in lower future dividend payments.”
For more news, information, and strategy, visit the Multi-Asset Channel.