Foreign ETF Advantages and Disadvantages

The Pros and Cons of International ETFs

While the US has a multitude of ETFs to add to your investment portfolio, there is a plethora of foreign country and region ETFs as well. However, before you invest in a foreign ETF, you should be aware of the risks and benefits.

Advantage: Foreign Exposure

traffic_analyzer/DigitalVision Vectors/Getty Images

If you feel there are some foreign regions that are potential growth areas or emerging markets, a country ETF may be the perfect asset to increase your international exposure. It's a great way to gain exposure to certain regions that may show opportunity during your investment research.

Disadvantage: Taxes

ETFs are known for their tax advantages. However, every country has different tax laws, so there may be particular foreign ETFs that are not a good fit for your etf trading strategy if they have a negative effect on your tax return. Make sure you research all tax laws of the region for your ETF before you make the investment as they can greatly differ and have an impact on your portfolio.

Advantage: Diversification

If your portfolio is heavy on domestic investments, some foreign exposure may help balance your overall stratagem. Adding a country or region ETF to your portfolio can expand your investment horizon and keep you well diversified.

Disadvantage: Currency Rates

While adding a foreign ETF may be a boon to your portfolio, you have to factor in the currency rates of your ETF region. If currency rates are skewed, a country ETF may not be the best match for your portfolio. So I would be sure to closely track the current local exchange rates before making any final trades. 

Advantage: Risk Management

If your portfolio or business has exposure to a certain region, investing in a foreign ETF may be a good way to reduce that risk and protect yourself against negative developments in certain countries. This is an especially sound strategy in areas with volatile weather or political climates.

Disadvantage: Flexibility

While the US has a lot of different ETF products to add to your portfolio, the selection may be sparse for other countries. Many regions don’t have a lot of ETFs, and they aren’t always to most liquid investments. Trading activity for foreign exchange-traded products can be limited and in turn, limit your investment strategy.

While foreign ETFs can help minimize risk, gain international exposure, and diversify your portfolio, you have to weigh the disadvantages of region ETFs before you get started and make your final decision to include them in your portfolio.

Thorough Research

As with any investment, a company stock, an ETF, Index or otherwise, please make sure you thoroughly research these exchange traded funds or any financial assets before making any trades (long or short). Conduct your due diligence, watch how they react to different market conditions, take a look under the hood and see what is in each of these funds. And if you have any questions or concerns, make sure you consult a broker, a financial advisor, or another financial industry professional. As we can see above, foreign ETFs have many advantages, but they have many disadvantages as well (as does any investment). So it is very important to understand the investment vehicle before you trade it. But once you have a full understanding on these funds, you can consider adding it to your portfolio. And good luck with all of your trades! Disclaimer: At the time of publication of this ETF spotlight, I do not have any open positions in the above foreign ETFs - Mark Kennedy