International investing can be an effective way to diversify your equity holdings. While returns have lagged behind US markets, international ETFs provide diversification benefits as they tend to be less correlated to US equities.
Broad exposure or targeted trading?
The amount of international exposure that’s right for you depends upon your risk tolerance and your level of involvement. If you want to take a more hands-off approach, you could leverage a broad-based international equity fund that provides exposure across several countries. For a more targeted approach, you can pursue a single-market ETF, as long as you're willing to track your investment on a daily basis.
In general, most investors may include a mixture of both developed and emerging markets in their international equity holdings. This can be accomplished through ETFs specifically targeting these sectors.
Vanguard FTSE Europe ETF (
You can take a similar broad-based approach to emerging markets with ETFs that focus on multiple countries across one or several regions. For example, iShares MSCI Emerging Markets ETF (
For a somewhat more focused strategy, investors can take the well-known BRIC approach that targets the combination of Brazil, India, Russia, and China, which has long been the gold standard of emerging-market investing. This brings to mind BRIC funds such as iShares MSCI BRIC (
Single-country promise and pitfalls
Although trading BRIC ETFs remain popular, risk-tolerant investors have been taking more of an active, hands-on approach, seeking out the newest emerging market ETF opportunities with funds that focus on individual countries such as Vietnam, Thailand, Turkey, and South Korea. Before jumping into a single-country strategy, however, you need to be aware of some serious potential downfalls as well as the promise for strong returns.
As you add single-country exposure to your portfolio, be mindful of the potential for overlap if you also hold a regional ETF. Overlap occurs when a broader-based fund includes exposure to a particular sector or market, which is then increased by a more targeted ETF: for example, let’s say you owned Vanguard FTSE Europe ETF (
Overlap is not the only concern when it comes to single-country investing: You might be exposed to currency risk. Not only that, the more targeted the approach, the more carefully you have to watch for sudden developments that could turn a potential growth story into a worrisome scenario. For example, in March 2022, U.S. based Russia ETFs were halted indefinitely due to regulator concerns as the Russian stock market closed. In most cases this led to liquidations and delistings of the ETFs, chasing investors out.
A market is hot, and then it's not. Therefore, the investment opportunities you pursue in a single country, particularly those in emerging markets, are often reaped over a period of months. These are not “buy and hold” investments for an auto-pilot type of investor. They require close monitoring on a daily basis.
On the other hand, a diversified international portfolio allows you to benefit more broadly from markets outside of the US, without exposing you to undue risk in a single country. For most investors, this is the way to go.
