Fortunately, owning another foreign ETF or two can help balance that problem out.
iShares International Select Dividend ETF (IDV)
Expense Ratio: 0.50%
Current P/E Ratio: 13.5
Top 3 Countries: UK, Australia, France
I always like to own one international dividend ETF, partially because I like the regular income, but mainly because adding a dividend metric to the selection criteria drastically changes the countries the ETF is weighted in. This helps balance out pure market capitalization weighted funds.
For example, foreign ETFs with a dividend requirement tend to have very little exposure to Japan, while foreign ETFs that are weighted purely by market capitalization tend to have Japan as by far their largest holding. By owning both a regular foreign ETF and a dividend foreign ETF, you can have a more even balance across major countries with less concentration in any given country.
The biggest downside for dividend ETFs is that they usually have higher expense ratios. The good news, though, is that IDV offers a dividend yield of nearly 4%.
Vanguard International High Yield ETF (VYMI)
Expense Ratio: 0.32%
Current P/E Ratio: 14.1
Top 3 Countries: UK, Switzerland, Australia
Another good international dividend ETF is this high-yielder from Vanguard.
It holds over 900 companies and yields over 3%, yet still manages to have a fairly low expense ratio due to Vanguard’s inherent competitive cost advantages.
Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.14%
Current P/E Ratio: 15.1
Top 3 Countries: China, Taiwan, India
Emerging markets usually have higher volatility than stocks from developed markets, but give strong returns over time. Over the last decade, emerging markets started off highly valued and due to reversion to the mean, they’ve had rather flat performance for a decade straight while the U.S. market has surged upward.
But now that they’re at reasonable valuations, I’m bullish on emerging markets over the next decade.
The biggest drawback to broad emerging markets funds is that, due to weighting by market capitalization, they tend to concentrate heavily in China. This particular fund has 30% exposure to China, and another 15% and 12% to Taiwan and India respectively.
iShares MSCI Brazil Capped ETF (BRZ)
Expense Ratio: 0.63%
Current P/E Ratio: 14.5
Top 3 Countries: Just Brazil
The downside of individual country ETFs is that their expense ratios are a bit higher, but on certain occasions it can be worth it. And I believe this may be one of those occasions.
As described above, emerging markets funds tend to concentrate heavily in Asia, and specifically China, and have very little exposure to South America. Single country ETFs like this one for Brazil can help balance that out.
Depending on how you measure it, Brazil is somewhere between the 7th and 9th largest economy in the world. But the Vanguard emerging market index fund only has 8% exposure to it, and the broad Vanguard total international market index fund has less than 2% exposure to it.
Between 2014 and 2017, Brazil had its worst recession in national history, which it just now appears to be emerging from. Valuations are low, the dividend yield is decent, and I believe there is considerable upside potential over the next decade if you can stomach the volatility.
Bringing It All Together
Personally, I own a developed market index fund in my primary retirement account, which is the only international option available from my employer. It’s heavily focused in Japan and doesn’t have any emerging markets exposure.
So, in my other accounts, I balance that out by owning an international dividend ETF, an emerging markets ETF, and a couple single country ETFs.
The best international ETFs for you will depend on what your other holdings are, and what you feel comfortable with. The main things to check are:
How much foreign exposure do you have in total?
Is your foreign exposure more concentrated than you realize?
What is your ratio between developed and emerging markets?
Answering those questions can help you select the right funds for you. When possible, pick the funds with the lowest expense ratios that meet your needs, and try to avoid having too much overlap between funds.
Disclosure: As of this writing the author holds shares of IDV and BRZ, and a variety of other international stocks and funds.
This article was republished with permission from Modest Money.