How to Invest in Foreign Markets with ETFs

Six Ways You Can Use ETFs for Your International Investment Strategy

A businessman uses a tablet to check his investments while riding in a car
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Investors are always looking for ways to increase their market exposure and capitalize on profitable opportunities. Worldwide investing is an option if you're looking to take on a little more risk.

International investing allows investors to diversify their investments by region. They can increase or decrease exposure to emerging, stable, or growing foreign investment types. Foreign exchange-traded funds (ETFs) are efficient. They're good assets for your portfolio, and they allow you to gain instant investing access in foreign markets.

You can use six types of international ETFs to diversify and increase your portfolio.

Key Takeaways

  • Foreign market ETFs include funds from countries or broader regions that allow you to focus your investments geographically.
  • Emerging market ETFs are based on securities from countries in periods of rapid growth, which may result in a degree of risk.
  • International bond ETFs and commodity ETFs can both be used to hedge foreign risk.
  • Currency ETFs are risky by nature. They come with a layer of complexity due to exchange rates, but they can be used to protect against bond inflation.

Specific Foreign Market ETFs

A foreign market ETF might be the best fit if you're looking to target a country in your plan. Market ETFs track the performance of a country’s finances by an index from that country's exchanges.

The indexes often consist of stocks that are necessary to the economic climate of the market. An overall change in the index or the companies included in the index mirrors the country’s shifting financial situation.

Ensure that the market you choose is politically stable. Civil unrest is one of many factors that can shut a market down. It can cause prices to plummet.

EWG, the iShares MSCI Germany Index ETF, tracks the MSCI Germany Index. The index contains companies in German sectors, such as information technology, utilities, and financial. Big changes to, or trends on, the index would imply that the economy is in flux.

It's possible to invest in the index by purchasing shares yourself, but ETFs offer benefits over direct investing, such as lower trading fees and some tax benefits.

Broad Foreign Market ETFs

Some market ETFs focus on a country or region. Others are more inclusive. A BRIC investment will include securities deriving from Brazil, Russia, India, or China. A BRIC ETF like BKF iShares MSCI BRIC Index ETF may be one way to do so if you're looking to invest in one or more of these countries.

There are other broad market ETFs besides BRIC products. They include Asia ETFs, Europe ETFs, and even North America and Latin America ETFs.

Emerging Market ETFs

Emerging market ETFs are funds based on securities from countries with growth potential. These countries have low incomes and are going through rapid social change. The countries that are thought to be emerging are listed on the Morgan Stanley Capital International Emerging Market Index (MSCI).

Similar to foreign market ETFs, emerging market ETFs have broad markets to choose from. An emerging market ETF might be a sound investment if you think there's potential profit in a particular country or a general region.

Broad market emerging market ETFs that focus on distinct regions can help you achieve some consistency.

One choice for an emerging market ETF is the Global X MSCI Colombia ETF (GXG). You could also choose a broad emerging market ETF that tracks most emerging countries, like the iShares Core MSCI Emerging Markets ETF (IEMG).

International Bond ETFs

Another way to invest in foreign markets is with international bond ETFs. Bond ETFs don't just increase your exposure to foreign regions. They can also create a fixed-income stream for your portfolio.

International bond ETFs benefit worldwide investors in that they can help hedge foreign stock ETF risk. You may want to look into foreign bond ETFs if you need upside or downside protection for your portfolio’s global stock risks.

Foreign Currency ETFs

As with other foreign ETFs, currency ETFs can track a country or a collection of currencies. But foreign currency investing is known for being very risky. Currency ETFs can mitigate much of this risk if the investor has more holdings based in their own country. The exchange rate risk is reduced.

It helps to know the risks to successfully invest in currency, such as sovereign defaults, GDP rate, unemployment rates, corruption, natural resources, and other economic factors. The CIA World Factbook provides relevant data for over 255 countries.

Long-term bonds carry inflation risk, so currency ETFs allow you to hedge foreign inflation risk in your portfolio.

Commodity ETFs

Most investors think that commodities are general or domestic investments, but that’s not the case. Like foreign ETFs, you can use a commodity ETF to gain worldwide exposure or hedge foreign risk in a portfolio.

You could use a coal ETF to offset risk from your other investments in a country where the chief outsource is coal. A solar energy ETF might pay dividends on a global scale if a country is developing alternative energy sources to combat an energy crisis.

Using a commodity ETF as a foreign investment is an advanced approach, but it can be very effective for investors and traders alike with the proper application.

Article Sources

  1. iShares. "iShares MSCI Germany ETF." Accessed Feb. 13, 2022.

  2. MSCI. "MSCI Germany Index (USD)," Page 2. Accessed Feb. 13, 2022.

  3. ETF Database. "BRIC ETF List." Accessed Feb. 13, 2022.

  4. MSCI. "Emerging Markets." Accessed Feb. 13, 2022.

  5. Global X. "MSCI Columbia ETF." Accessed Feb. 13, 2022.

  6. iShares. "iShares Core MSCI Emerging Markets ETF." Accessed Feb. 13, 2022.

  7. World Factbook. "Explore All Countries." Accessed Feb. 13, 2022.